February 2019 NewsletterFebruary 15, 2019 | Newsletter
Garrett is in the business of acquiring, remediating, and reselling contaminated properties. In June 2014, Garrett purchased for $1.00 the former Dalton Foundry, a property located in Kendallville, Indiana, that had been vacant since 2009. After purchasing the property, Garrett performed an environmental investigation, which disclosed that its soil and groundwater contained chlorinated solvents and metal contamination. In addition, the evaluations revealed that the property was covered with foundry sand, requiring two feet of clay surface and a foot of topsoil in order to build on it.
Garrett entered a Voluntary Remediation Program with the State of Indiana that exchanged a covenant not to sue for the remediation of the property. Garrett sold a 10-acre portion of the property, referred to as The Mound, at a discount to East Noble School Corporation for building a new middle school. The sale proceeds helped Garrett fund both the demolition of the old Dalton factory and the environmental cleanup costs.
For the assessment date of March 1, 2015, the Noble County Assessor valued the land and improvements at $200,000. Garrett protested the assessment to the Noble County Property Tax Assessment Board of Appeals. After an informal meeting, the Assessor did not lower the $200,000 assessed value but did agree to reallocate the property’s assessed value by reducing the land value to $68,900 and increasing the value of the improvements to $131,100. On May 20, 2015, Garrett transferred 4.75 acres of the property to Garrett Well, LLC. Thereafter, Garrett demolished all the buildings on the portion of the property it retained. For the assessment date of January 1, 2016, the Assessor valued the property at $131,700: $121,700 for 20.28 acres of land and $10,000 for improvements. Garrett protested the 2016 assessment to the Board of Appeals and the Board reduced the total assessed value to $105,400: $95,400 for the land and $10,000 for the improvements. Dissatisfied, Garrett pursued an appeal with the Indiana Board. The Indiana Board found that Garrett had provided undisputed probative evidence for reducing the 2016 assessment of improvements by demonstrating that no buildings remained on the property on the January 1, 2016, assessment date, but that Garrett’s evidence was not probative of the property’s 2016 market value in-use. Accordingly, the Indiana Board left the land valuation of $95,400 unchanged.
The Indiana Board determined, however, that the property’s June 2014 sales price was not probative evidence of the property’s 2016 market value in use because Garrett did not present evidence a) that the price was the result of a market value sale, b) that it was valueless because it was contaminated land, and c) how the June 2014 sales price related to the January 1, 2016, assessment date. The Tax Court affirmed. The Court agreed that Garrett “failed to establish the property was exposed to the market for a reasonable time.” Garrett learned about the property through a personal meeting with the mayor and not from a sale listing. Further, the 2014 sale appeared to be the result of undue duress because the property was vacant and up for tax sale. The Tax Court also rejected Garrett’s claim that the June 2014 sales price reflected the property’s market value in use on the 2016 assessment date because contaminated property is valueless. Evidence that a property suffers from contamination, said the Court, does not by itself necessitate a finding that a property is valueless. Finally, the Court agreed that the June 2014 sales price was not probative because Garrett failed to relate the sales price to the valuation date, which was approximately 18 months later on January 1, 2016, with competent evidence. Garrett’s appeal was rejected as relying on legal conclusions unsupported by the record evidence.
Garrett LLC v. Noble County Assessor, — N.E.3d —-, 2018 WL 4690975 (Indiana Tax Court, September 24, 2018).
TBM-WC Sabine, LLC (TBM) owns a natural gas pipeline and surface equipment at its Amine facility located within Sabine Parish, Louisiana. TBM filed a tax return, known as a rendition, with the Sabine Parish Tax Assessor’s office for tax year 2015. In its rendition, TBM set forth the dimensions and age of its Toledo Bend-Wildcat system pipeline which it identified as comprising “approximately 12.5 miles of 16 [inch] trunkline and 19 miles of 10 [inch] trunkline.” According to documents submitted by TBM, 19 miles of 10-inch pipeline were installed in 2013 at a total cost of $6,317,880 and 12 9∕10 miles of 16-inch pipeline were installed from 2009-11, at a total cost of $6,967,071. The document further indicates that 19 miles of this pipeline was in 96% good condition and 12 9∕10 miles was in 86-91% good condition. Additionally, TBM provided information that the surface equipment at its Amine facility was installed between 2002 and 2010 at a total cost of $1,426,140. TBM stated the facility was idle at the time of its tax filing but the pipeline was still in use. TBM asserted in its submission to the Sabine Parish Assessor that the combined fair market value of the pipeline and surface equipment should ultimately be valued for 2015 tax purposes at $1,979,600 based on an 85% reduction in fair market value for obsolescence of both the pipeline and the surface items comprising its idle facility.
Applying the information provided by TBM, the Assessor, using a State-approved series of tax tables, calculated the base fair market value of the facility. This valuation was not disputed. In its rendition, TBM requested a reduction in fair market value, asserting obsolescence for both its surface equipment and pipeline. In an exhibit in support of this request, TBM describes the pipeline’s current capabilities as follows: “Gas can easily flow north and south across the system at any given time with existing access to multiple takeaway pipeline operators.” In addition to this information, TBM provided the Assessor with an unaudited, unattributed, single-page financial statement of its parent company and other subsidiaries. This one-page income statement for the parent holding company did not delineate information specific to TBM. TBM also provided a single-page document, with no supporting data, purportedly showing the utilization percentage of its Wildcat pipeline. These documents and information were the only items submitted to the Assessor in support of TBM’s requested 85% reduction in the assessed value of its pipeline. The Assessor found the information regarding obsolescence of the pipeline insufficient to establish the requested 85% reduction for fair market valuation of the pipeline. Instead, she applied a 12% reduction for obsolescence regarding the pipeline and a 90% reduction in the assessed value of TBM’s surface equipment for its facility. TBM challenged only the 12% obsolescence reduction for the pipeline. The Parish Board of Review upheld the Assessor’s valuation, and TBM appealed to the Louisiana Tax Commission, which, based on evidence TBM did not submit to the Assessor, awarded an additional 10% obsolescence on the pipeline for a total reduction in assessed value of 22%. The Assessor appealed to the Judicial District Court, which reversed and reinstated the decision of the Board upholding the Assessor‘s valuation. TBM appealed.
The Court of Appeals said that TBM confused the method for valuing intrastate pipeline, such as this one located solely within Sabine Parish, from that used to value interstate or public service pipelines for which a different valuation method is used for ad valorem tax appraisals. In the valuation of public service or interstate pipelines the appraiser “looks to the value of the business itself or the going concern of the company, and not just the hard assets of the company.” In its effort before the Louisiana Tax Commission, TBM attempted to use this valuation method to value its intrastate asset in Sabine Parish. The Assessor instead valued the pipe in the ground by a cost less deterioration method in accordance with the legislatively and administratively mandated method of appraisal. The administrative code directs the Assessor to consider the effect of economic obsolescence on the final determination of whether to reduce the assessed fair market value for obsolescence only when properly “substantiated by the taxpayer in writing.” TBM did not provide such substantiation.
The Court of Appeals rejected TBM’s assertion that “the burden of investigating and obtaining data for determination of fair market value [is] upon the assessor, not the taxpayer.” The Court observed that a parish assessor “may rely on self-reporting by the taxpayer” and “our courts have long held that the party seeking obsolescence bears the burden of producing sufficient evidence to the assessor.” Although TBM faulted the Assessor for failing to “gather all the necessary information to determine the fair market value” of its pipeline, under Louisiana law it was incumbent on TBM to provide all data and information to the Assessor to support its request for adjusting the fair market value of its pipeline on the basis of obsolescence. TBM makes no showing and no assertion that the additional information it provided the Louisiana Tax Commission in its effort to convince the Commission to change the assessment was unavailable to it when it filed its rendition. The information that was presented to the Assessor was insufficient to support TBM’s position.
TBM-WC Sabine, LLC v. Sabine Parish Board of Review, 250 So.3d 1075 (La.App. 3 Cir. July 18, 2018).
OREGON – Supreme Court Rejects Department of Revenue Valuation based on Power Purchase Agreement Favorable to Taxpayer that Erroneously Considered Intangible Assets by Valuing Taxpayer’s Entire Property and Business
The Department of Revenue appealed from a Tax Court decision, claiming that it erred in concluding that it had jurisdiction to consider a challenge brought by Seneca Sustainable Energy LLC to the Department’s determination of the real market value of Seneca’s electric cogeneration facility and the notation of the real market value on the assessment roll for two tax years, 2012-13 and 2013-14. In 2009, Seneca began construction of a biomass cogeneration facility on property that it owns outside Eugene, Oregon. The cogeneration facility would generate electricity by burning wood waste produced by Seneca’s nearby sawmill. Around that time, Seneca also began negotiating a long-term power purchase agreement, under which it would sell the electricity generated at the cogeneration facility to the Eugene Water and Electric Board (EWEB). Seneca and EWEB ultimately finalized the power purchase agreement in February 2010. Among other things, the agreement set the rates that EWEB would pay for electricity, capacity, and renewable energy credits.
After rejecting the Department’s procedural argument, the Court went on to discuss the Tax Court’s determination of the value of the Seneca facility. The Department’s appraiser, using the income approach, valued Seneca’s property at $59.9 million. The Department’s appraiser based his valuation on his understanding that the rates set out in Seneca’s power purchase agreement with EWEB were rates that a purchaser of the facility could expect to receive for electricity, capacity, and renewable energy credits during the tax years at issue and on into the future. Building upon that premise, the Department’s appraiser used the rates that EWEB was obligated to pay Seneca under the power purchase agreement to project future income for the cogeneration facility.
Seneca, by contrast, presented evidence that, as of the assessment dates, the power purchase agreement resulted in revenues significantly above what a purchaser of the property on the assessment dates could have obtained. Seneca’s witnesses testified that the price a purchaser would have been willing to pay for electricity on January 1, 2012, and January 1, 2013, was significantly depressed as a result of natural gas prices plummeting in the period after Seneca entered into the power purchase agreement with EWEB. Additionally, Seneca’s witnesses presented evidence that, although the power purchase agreement included substantial payments for capacity, it is unusual in the Northwest for utilities buying from cogeneration facilities to pay for capacity due to the constant availability of hydroelectric power. For that reason, such payments would not have been available to a purchaser of the biomass facility on the assessment dates. Similarly, Seneca’s witnesses demonstrated that a purchaser of the biomass facility could have expected little, if any, revenue from renewable energy credits on the assessment dates, because the biggest market for the credits—California—had essentially become closed to Oregon renewable energy generators after a change in California law.
The Tax Court found that Seneca had been “extremely fortunate” to negotiate the terms that it had, due to changes in the market after the power purchase agreement was executed, and that the rates in the power purchase agreement were not available as of the assessment dates and would not be available in the future. The Department’s appraiser erred in concluding that a purchaser of the Seneca facility on the assessment date would have been able to sell energy, capacity, and renewable energy credits at the rates included in the power purchase agreement. The Tax Court also held that the Department’s appraiser had failed to use an appropriate capitalization rate, and had erroneously considered intangible assets in determining real market value, since in valuing Seneca’s entire property and business under the income approach, he had subtracted only an amount for working capital, thus subjecting to assessment Seneca’s good will and going concern value, which are intangibles and not taxable in Oregon.
In contrast, the Tax Court found that Seneca’s appraiser correctly applied the income approach, projecting income based on evidence of the rates that would have been available to a purchaser of the property without regard to any premium rates or other terms in the power purchase agreement, and used an acceptable capitalization rate. Seneca’s appraiser had used accepted financial and appraisal methods in developing a capitalization rate, and, therefore, the Tax Court found Seneca’s appraisal the more persuasive of the two presented to the court. The Supreme Court agreed with the Tax Court’s analysis and affirmed the judgment.
Seneca Sustainable Energy, LLC v. Department of Revenue, 363 Or. 782, 429 P.3d 360 (2018).
MINNESOTA – Tax Court Rejects Calculation of External Obsolescence of Ethanol Production Facility Based on “Inutility” and Operating Capacity in Arriving at Taxable Fair Market Value of its Assets
Waseca County moved to amend the findings of an earlier Tax Court decision determining the market value of rural ethanol production facility in Waseca County, Minnesota. The Court treated the motion as a motion for reconsideration and denied it on the merits. Previously, the County had suggested that economic obsolescence could be measured by the proportion of ethanol plants operating as of each valuation date. According to the County, 89% of U.S. ethanol plants (171 out of 191) were operating as of January 1, 2009; 94.5% (189 out of 200) were operating as of January 1, 2010; and 99.5% (204 out of 205) were operating as of January 1, 2011. The County urged the Tax Court “to conclude that the ratio of closed to operational plants is a strong indicator of the external obsolescence of the Subject Property.”
The Tax Court rejected the County’s suggested approach, first because a computation of excess capacity based on the sheer number of ethanol plants in operation fails to consider differences in the capacities of those plants, and also the demand for ethanol during the years in question was fixed by statute. Moreover, said the Court, a measure of economic obsolescence based on the proportion of ethanol plants not operating on each valuation date does not take into consideration why a particular plant was not operating—a reason that may reflect only the operation of that particular plant and not the state of the industry as a whole. The Court said that based on those considerations, the proportion of ethanol plants closed or not operating as of any valuation date at issue was not an appropriate or accurate measure of economic obsolescence applicable to the subject property.
In its more recent filing, the County advocated using an “inutility” approach to calculate external obsolescence by comparing either “industry level demand for ethanol to its supply” or “comparing the plant level production capacity to its utilization or production.” The “inutility” approach is “a generally accepted method of calculating obsolescence, [which] is estimated by comparing the property’s capacity to its use level and adjusting the result for economies of scale.” However, the Court rejected this approach for lack of record evidence. The County suggested a host of factors for the Court’s consideration, including the statutory mandate for increased ethanol blending with gasoline, the growing market for ethanol exports, expanding sales of co-products generated by the ethanol production process, “[t]he virtual cessation of construction of new ethanol plants,” “the significant investments made by both ethanol and oil industry participants in purchasing existing properties,” and the “larger size” of the subject facility. The Court said that the approach for which the County advocated was inherently objective but that it lacked sufficient facts in the record to calculate “normal capacity” or the scale factor (the marginal cost factor inherent in achieving a given level of additional capacity) of either the ethanol industry as a whole or the subject facility. The County also did not explain how the other factors mentioned should be factored in a determination of external obsolescence.
Guardian Energy, LLC v. County of Waseca, 2018 WL 911219 (Minn. Tax Regular Div., February 2, 2018).
Hiland Crude, LLC brought a declaratory judgment action against the Montana Department of Revenue challenging its tax classification of Hiland Crude’s crude oil gathering pipelines. Hiland Crude owns and operates crude oil gathering and transmission pipeline systems in Montana. Third-party shippers pay Hiland Crude to transport crude oil through all of its systems.
The gathering systems comprise a network of small-diameter pipelines that are connected to facilities located at or adjacent to crude production wells. The systems operate at a low pressure. They aggregate crude oil from multiple production wells and receipt points and deliver it to an interconnection with larger, high-pressure transmission pipelines. They are considered “gathering systems” under industry standards, the American Petroleum Institute definition, and Federal Energy Regulatory Commission (“FERC”) accounting standards. They are also subject to FERC tariffs for gathering. The transmission pipeline is subject to separate FERC tariffs for transmission.
Prior to 2013, the Department assessed Hiland Crude’s gathering pipelines locally and classified them as class eight property, taxable at 1.5-3% of market value. The Department began centrally assessing Hiland Crude’s property in 2013 as class nine property because the company met the definition of a “pipeline carrier” under the class nine statute. Class nine property is taxed at 12% of its market value. Hiland Crude filed a declaratory judgment action challenging the classification, and the District Court granted summary judgment in favor of Hiland Crude. The Department appealed. The Supreme Court affirmed, holding that the gathering pipelines should have been classified as class eight property taxed at 1.5-3% of its market value, rather than as class nine property taxed at 12%. Hiland Crude used its gathering pipelines for one purpose, gathering crude oil and transporting it to an interconnection with a transmission line, which fell under the statutory definition of flow lines and gathering lines.
The Department argued that the term “pipeline carrier” as used in the statutes does not distinguish between gathering lines and transmission lines, so Hiland Crude’s gathering lines should be considered to be class nine property. Rather, it argued, based on the federal definition, the term applies to all pipelines that carry oil for compensation. The Department maintained that certain flow lines and gathering lines, such as Hiland Crude’s systems, fall into class nine because they carry oil for compensation. The Court held that the Department’s arguments failed to account for an express distinction in the statutory definitions of class eight and class nine property between transmission lines and gathering lines. Section 15-6-141(1)(d), MCA, defines class nine to include a broad category of pipelines, including transmission pipelines, common carrier pipelines, and pipeline carriers. Section 15-6-138(2)(c), MCA, defines class eight to include a more specific subset of pipelines—namely, flow lines and gathering lines, and defines them by the use to which the pipeline is put: “pipelines used to transport all or part of the oil or gas production from an oil or gas well to an interconnection,” with a pipeline described as class nine property under § 15-6-141(1)(d), MCA. The statute defining class eight provides the boundaries of that class and treats all flow lines and gathering lines the same. The plain language of §§ 15-6-138 and -141, MCA, reveals that class eight differentiates “flow lines and gathering lines” from the broader definition of pipelines defined in class nine. The Court concluded that it was plain from the language of the statutes defining class nine and class eight that the Legislature intended to differentiate for tax classification purposes larger transmission lines from pipelines that gather and transport oil or gas “from an oil or gas well to an interconnection.”
Hiland Crude, LLC v. Department of Revenue, 392 Mont. 44, 421 P.3d 275, 2018 MT 159 (July 3, 2018).
CALIFORNIA – Assessor May Assume that Option to Extend Lease of Federal Land Will Be Exercised in Valuing Leasehold for Property Tax Purposes
In 2007, Glovis America, Inc. began to lease land from the Navy to provide vehicle inspection and processing services at the Port of Hueneme in Ventura County. In 2013, Glovis and the Navy signed a five-year lease that is exempt from federal contract term limits with two five-year options at the request of the lessee and approval of the Navy. The Ventura County Assessor issued a tax bill for the 2014-2015 tax year and a supplemental tax bill for 2013-2014. The Assessor determined that Glovis’s reasonably anticipated term of possession is 15 years. He valued Glovis’s lease based on the 15-year term.
Glovis appealed the assessments to the Assessment Appeals Board in October 2014. Citing the lease and a 2011 newspaper article, Glovis claimed the lease did not include an extension option because 1) Glovis lacked the unilateral right to extend the lease term, 2) the contract was subject to competitive bidding every five years, and 3) previous leases did not include options. Glovis also argued that even if the lease did include an option, it could not be determined whether it would be exercised.
The evidence showed that this was Glovis’s fifth lease with the Navy. All of the prior leases were renewed. While prior leases were subject to competitive bidding, this one was not. And this was the first lease to include an option to extend the lease term. The Board determined that Glovis did not meet its burden of showing the assessments were incorrect. Glovis presented no evidence of the parties’ intent when they included the option language in the lease. It presented no evidence that the Navy did not intend to approve any lease extension. To the contrary, Glovis’s previous relationship with the Navy, the parties’ desire for long-term stability, the lease’s rental renegotiation term, and the implied exemption from federal competitive bidding requirements showed that the parties contemplated a 15-year term of possession.
Glovis challenged the Board’s determinations in the Trial Court. After the Court granted the County’s motion for judgment on the pleadings with leave to amend, Glovis filed an amended complaint, which included an amendment to the lease executed 12 days after the Court’s ruling on the County’s motion. The amendment stated that the parties intend that the lease 1) “provide for a stated term of five years,” 2) give Glovis a “right to request” a term extension, and 3) permit the Navy to approve or reject any extension request. It also states that the parties did not intend to convey “any rights in law or in equity in the event a request for extension is rejected by [the Navy].” The Trial Court concluded it could not consider the amendment, and sustained without leave to amend the County’s demurrer to Glovis’s amended complaint. Glovis appealed.
The Court of Appeal affirmed. Glovis argued on appeal that the Court should consider the 2017 lease amendment to determine whether the original included an option to extend the term of possession. The Court of Appeal concluded that there was no need to do so because the lease was not “reasonably susceptible” to Glovis’s proffered interpretation. The Court held that when a lease of federal lands includes an option to extend its term and the tax assessor reasonably concludes that the option will likely be exercised, the value of the leasehold interest is properly based on the extended term.
Glovis America, Inc. v. County of Ventura, 28 Cal.App.5th 62, 238 Cal.Rptr.3d 895(Ct App., 2nd Dist., Div. 6, October 10, 2018).