Cost Containment Advisors

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April 2016 Newsletter

April 1, 2016 | Newsletter
MARYLAND – Tax Court rejects coal-fired electrical generating plant’s claim that highest and best use of its property is a natural gas plant.

Genon Mid-Atlantic, the owner of Dickerson Generation Station, a non-regulated utility generator, appeals its 2009 and 2010 personal property assessments of $489,220,840, which were based on original cost less depreciation. After exemption deductions for generation equipment and coal pollution control equipment, the actual assessed values for 2009 and 2010 were $151,956,140 and $140,426,400, respectively.

On appeal, Genon contended that commencing in 2000, the electric generation market in the State of Maryland transitioned from a vertically integrated and monopolistic electricity market to a competitive wholesale market, where electricity prices became determined by the basic economic principles of supply and demand. As a result, a standalone generation facility would be valued by buyers solely for its ability to generate revenue in excess of operating costs, at an expected rate of return and over a given period of time. Generation revenue is a function of the ability to provide electricity to the market at a price lower than the competition, while operating costs consist of both fixed and variable costs.

During the years in question, Genon argued that there was a convergence of events that caused a fundamental change in the market and a decrease in the value of Dickerson which the State failed to recognize in its assessments. First, Genon claimed that Dickerson was at a competitive disadvantage using subcritical technology much less efficient than both other competing coal plants and that as a result, its net generation and net operating income declined by over thirty percent from 2005 to 2010. In addition, Genon provided expert testimony that Dickerson’s purchase price would also have been adversely impacted by the decline of natural gas prices, commitments to reduce energy consumption, increased efficiency and conservation of electricity use and renewable power resources, environmental uncertainties, and the increasing obsolescence of coal plants.

Due to the alleged fundamental changes in the energy market, Genon claimed that natural gas became the fuel of choice, while coal was no longer a desired source of energy, as of the valuation dates. Genon’s replacement cost would replace the Dickerson plant with a gas plant, rather than a coal-fired plant, on the basis that a coal-fired plant is no longer the highest and best use of the property.

The Court disagreed that a gas plant replacement represented the highest and best use of Dickerson on the assessment date, because the Court found no credible evidence that the plant should or would be retired. Genon had invested hundreds of millions of dollars in the coal plant for pollution control equipment close to the assessment date. The plant is ideally-located and fully compliant with all pollution control regulations, making it more valuable than non-compliant coal plants. Even with an increasing supply of natural gas through “fracking,” a substantial market still exists for coal plants, which are the dominant supplier of energy in the United States, providing about 40% of the overall energy supply. A decrease in overall demand simply makes the more efficient plants like Dickerson more valuable to a potential purchaser.

Genon Mid-Atlantic, LLC v. State Department of Assessments & Taxation, (Maryland Tax Court, October 14, 2015) 2015 WL 9875283

NEW YORK – Appellate Division holds that Town may be third-party beneficiary of a provision limiting the generator’s right to appeal property tax assessments in a supply agreement between an energy generating company and a power authority.

In June 1997, Long Island Lighting Company entered into a “Power Supply Agreement” with Long Island Power Authority, whereby the Company agreed to sell and deliver to the Authority energy produced from its power generating facilities in Nassau and Suffolk Counties, including certain facilities located in the Town of Huntington. Under § 21.16 of the agreement, the Company was only entitled to challenge property tax assessments on its “Generating Facilities … if the assessment on any such challenged facilities is increased not in an appropriate proportion to the increase in value related to taxable capital additions affixed to the tax parcel between the last two tax status dates.” In October 2010, during the term of the Agreement, the Authority commenced a tax certiorari proceeding to challenge tax assessments levied against “the Northport facilities” which were located within the Town.

In May 2011, the Town commenced this action to recover damages for breach of contract against the Authority and the Company. The Town alleged that it was an intended third-party beneficiary of the Agreement, and the Authority was precluded from bringing the tax certiorari proceeding because the specific condition stated in that section of the Agreement was not applicable. The Authority and the Company moved to dismiss, on the basis that any benefit accruing to the Town from that provision was merely incidental.

In support of their motion, the Authority and the Company submitted the Agreement, which they contended established as a matter of law that the Town was not an intended third-party beneficiary. In opposition, the Town submitted an affidavit from the Town Supervisor stating that the Supervisor had discussions with the Chairman of Authority prior to the issuance of the Agreement regarding his concerns “about the potential of the Authority filing tax certioraris,” that the Chairman had “promised to work with the Town … to make sure [it] w[as] protected in the Agreement,” and that § 21.16 of the Agreement was included “for the direct benefit of the Town” based on those discussions. This affidavit incorporated by a reference a letter dated August 6, 1997, in which the Chairman advised the Supervisor that upon the issuance of the Agreement, “all pending certiorari proceedings against the Town … will be withdrawn,” with no challenge to any tax assessments “[i]n the future,” except under certain circumstances not here relevant.

The Court held that in the absence of any language in the Agreement expressly negating enforcement by third parties, it could not be said that the documentary evidence submitted by the defendants “utterly refutes” the Town’s allegation, and affirmed the denial of the motion to dismiss.

Town of Huntington v Long Island Power Authority, 12 N.Y.S.3d 912, 2015 N.Y. Slip Op. 06332 (July 29, 2015).

Note: The Supreme Court, Appellate Division, reached a similar conclusion in Board of Education of Northport – East Northport Union Free School District v. Long Island Power Authority, 130 A.D.3d 953, 14 N.Y.S.3d 450, 320 Ed. Law Rep. 355, 2015 N.Y. Slip Op. 06304 (July 29, 2015), where it denied a motion to dismiss a school district’s breach of contract claim that a utility’s commencement of a tax certiorari proceeding violated the terms of a power supply agreement between the utilities, to which theschool district was an intended third-party beneficiary.

UNITED STATES DISTRICT COURT – District Court for the District of Rhode Island holds that challenge to state statute limiting interest awards to power company prevailing in tax appeal is not ripe for review.

Ocean State Power LLC is a Rhode Island company which owns and operates two power plants in the Town of Burrillville. Ocean State has filed several tax assessment appeals against the Town, which are currently pending in Rhode Island state courts. Ocean State claims that the Town, in response to Ocean State’s first tax assessment appeal, obtained special legislation from the State of Rhode Island that limits pre-judgment interest related to tax assessment appeals against the Town to $100,000 per appeal. Ocean State filed suit seeking a declaratory judgment that the Statute is unconstitutional because it violates Ocean State’s equal protection and substantive due process rights under the United States and Rhode Island Constitutions. The Town moved to dismiss the complaint on the grounds that the matter is not “ripe” for review.

The Town, pursuant to a Tax Treaty with Ocean State, and without providing annual tax value assessments of Ocean State’s properties, received nearly $74 million from Ocean State over a twenty year period, averaging about $3.7 million per year. After the Tax Treaty expired and the parties were unable to come to a similar agreement, the Town put Ocean State’s properties on its tax rolls, provided annual property value assessments, and taxed Ocean State’s properties based on those assessments. For the years 2011 through 2014, Ocean State paid the Town $11,491,876 in taxes, but disagrees with the Town’s valuations of its property and has challenged the assessments based on those valuations by filing four separate appeals in Rhode Island state court, all of which are currently pending.

Ocean state argues that its properties should have been assessed at only at about half the value the Town assigned to them. Accordingly, Ocean State seeks an abatement of about half the taxes it has already paid to the Town. The first of Ocean State’s appeals is scheduled to go to trial later this year. The second appeal was dismissed on the Town’s motion for summary judgment and is currently on appeal in the Rhode Island Supreme Court. The last two appeals are in the discovery stage and have not yet been scheduled for trial.

The Court observed that in the event that Ocean State prevails in any of these appeals, the Statute, if upheld, may preclude Ocean State from collecting, or being credited with, any pre-judgment interest amounts in excess of $100,000. If the Town prevails in the litigation over its tax assessments of Ocean State’s properties or if the assessments are reduced by only a portion of Ocean State’s suggested evaluations, the challenged Statute will not come into play at all. In other words, said the Court, the validity of the Statute and its potential impact on Ocean State will become relevant to Ocean State only after a determination has been made in Ocean State’s tax assessment appeals now pending in Rhode Island state court. Under these circumstances, the Court found that the Statute, which has not yet had, and may never have, a direct effect on Ocean State’s claims against the Town, does not inflict a present hardship on Ocean State sufficient to support a finding of ripeness – its claim involves uncertain and contingent events that may not occur as anticipated or may not occur at all.

Ocean State Power LLC v Town of Burrillville ex rel Mainville (D. Rhode Island, August 14, 2015) 2015 WL 4879058

OHIO – Supreme Court holds that Board of Tax Appeals lacks the authority to consider whether the county auditor has issued property tax assessment frivolously and in bad faith, such as to warrant sanctions.

Martin Marietta Energy Systems, Inc., n.k.a. Lockheed Martin Energy Systems, Inc., operates a uranium-enrichment facility owned by the federal Department of Energy. Lockheed Martin appealed a decision of the Board of Tax Appeals that affirmed an Ohio Tax Commissioner’s cancellation of personal property tax assessment but did not address Lockheed Martin’s contentions that the county auditor issued theassessment frivolously and in bad faith.

The Portsmouth Gaseous Diffusion Plant located in Piketon was developed as a uranium-enrichment facility by the United States Atomic Energy Commission, and from the mid–1950s forward the plant was owned by the federal government but operated by private contractors. In 1977, the United States Department of Energy was created and assumed authority over the plant. In 1986, Lockheed Martin became the contractor that conducted the operations at the site, taking over in that capacity from Goodyear Atomic Corporation.

At issue in this appeal was a personal-property-tax assessment for tax year 1993 against Lockheed Martin. All the tangible personal property at the plant was titled to the federal government. The former plant manager testified that the contract between the Department of Energy and Lockheed Martin specified that “all the land, the buildings, the equipment, even the pens and pencils were property of the U.S. government,” and that the contract’s government-property clause specifically provided for the contractor to be reimbursed by the government for any property acquired and provided that title to the property passed directly from the vendor to the government.

The contract between the Department of Energy and Lockheed Martin also provided that Lockheed Martin would notify the Department of Energy about any attempt by state or local authorities to collect taxes and would be subject to the directions of the Department of Energy regarding the nonpayment or payment under protest of taxes, with the understanding that the Department of Energy would be granted any right to contest the taxes and would hold the contractor harmless as to them.

The Department of Energy had entered into a payment-in-lieu-of-tax (“PILOT”) agreement with the County for tax years 1992 through 1997, providing for a single payment of $175,546.83 for the six years covered, an average of $29,257.80 a year. The PILOT agreement’s stated reason for the Department of Energy’s “payment in lieu of property taxes for County government purposes” was to replace “ad valorem tax revenue” that was foregone because the United States owned the Piketon plant. The agreement also stated that “[s]uch payment shall constitute full satisfaction of any and all claims the County may have for taxes for tax years 1992 through 1997 against DOE and DOE’s contractors, of any nature whatsoever, on, with respect to, or measured by the value or use of Government-owned real or personal property which is utilized in carrying on activities of DOE.” An exhibit to the PILOT agreement recognized Lockheed Martin as one of the Department of Energy’s contractors.

For many years, the taxing authorities in Ohio regarded personal property owned by the federal government and used by its contractors as not subject to taxation. But in 2010, an administrator of the Ohio Department of Taxation, in written correspondence on the department’s letterhead, stated the “conclusion that the [federal government’s] personal property is subject to taxation and should have been listed for taxation by the contractor, i.e. the manufacturer operating the [Piketon plant].” The county auditor then took action based in large part on this conclusion, and on December 23, 2010, issued a “preliminary assessment certificate of valuation” for tax year 1993, naming Lockheed Martin as the taxpayer and stating the “amended value” of the personal property determined to be subject to taxation as $158,512,000. After receiving the assessment, Lockheed Martin filed a petition for reassessment challenging the levy of the personal property tax, and the Tax Commissioner issued a final determination that canceled the assessment on the primary ground that it was barred by the PILOT agreement. The Board of Tax Appeals affirmed, agreeing with the Tax Commissioner that the assessment was barred by the PILOT agreement and also holding that Lockheed Martin did not qualify as a “taxpayer” because it did not own or have a beneficial interest in the personal property at issue.

On appeal to the Ohio Supreme Court, Lockheed Martin claimed that the Board of Tax Appeals erred by failing to make findings of bad faith and frivolous conduct by the auditor and by its failure to award sanctions for that conduct. The Supreme Court rejected this argument, explaining that the enabling statute confers upon the Board of Tax Appeals the authority to “affirm, reverse, vacate, modify, or remand the tax assessments, valuations, determinations, findings, computations, or orders complained of in the appeals determined by the board.” However, the Court observed, no statute confers upon the Board the authority to find bad faith or frivolous conduct nor does any statute confer the power to impose sanctions on the party whose decision is under review based on the nature of the decision appealed from.

Snodgrass v. Testa, — N.E.3d —- (Ohio, December 24, 2015) 2015 WL 9312554

INDIANA – Tax Court holds that assessed value of business tangible personal property reported on taxpayer’s return prevailed where County Tax Assessment Board of Appeals failed to issue timely determination.

The Indiana Board of Tax Review entered summary judgment in favor of Verizon in its appeal from a business tangible personal property tax assessment because the Allen County Tax Assessment Board of Appeals failed to issue its final determination within the statutorily prescribed time period, and the assessors and Board of Tax Review appealed.

In May, 2015, Verizon filed its business tangible personal property return with the Washington Township assessor, reporting the assessed value of its personal property at $21 million for the 2005 tax year. On September 15, 2005, the Township assessor issued a Notice of Assessment/Change to Verizon that increased the 2005 personal property assessment to nearly $58 million. Verizon filed a timely notice with the assessor that it was seeking review of the assessment with the Board of Appeals and that the assessor should contact its attorneys to schedule a preliminary conference. When the Township assessor contacted one of Verizon’s attorneys, he requested that the conference be scheduled at a time that allowed Verizon’s representatives to appear in person.
The Township Assessor and Verizon ultimately held the preliminary conference on July 12, 2006. When the two parties were unable to reach an agreement, one of Verizon’s attorneys requested that the Board of Appeals hearing not be held until certain matters could be discussed with his client. On October 26, 2006, the Board of Appeals held a hearing, and on May 7, 2007, the Board issued a Notification of Final Assessment Determination that reduced Verizon’s personal property assessment to $50,777,790 for the 2005 tax year.

Verizon appealed the Board’s decision to the Indiana Board, asserting that certain statutory and constitutional valuation provisions required its personal property assessment to be further reduced. Verizon then moved for summary judgment on the sole issue that the Board’s Notification of Final Assessment Determination was untimely because it should have been issued by October 30, 2005, pursuant to Indiana Code §§ 6–1.1–16–1 to –4 (Chapter 16).
After discussing an apparent conflict among the timing provisions in the Indiana Tax Code, the Court held that the Board was required to issue its determination by October 30, 2005, which it did not, and that because the assessing officials failed to act within the statutorily prescribed periods, the assessed value reported on Verizon’s personal property return prevailed. The Court rejected the estoppel and waiver claims made by the assessors and the Board of Appeals, because Verizon had filed a timely notice of review, was under no obligation to notify the Board of Appeals of its statutory deadlines, and Verizon did not represent either explicitly or implicitly that it would forego its rights to a decision within the statutory period.

Washington Township Assessor v. Verizon Data Services, Inc., 43 N.E.3d 697 (Ind. Tax Ct., October 30, 2015) 2015 WL 6638847.