Cost Containment Advisors

1-203-531-0770 15 East Putnam Avenue
Greenwich, CT 06830

January 2012 Newsletter

January 1, 2012 | Newsletter
WISCONSIN – Wisconsin Supreme Court holds 2007 Wis. Act 86 unconstitutional – all Wisconsin taxpayers entitled to de novo review: The taxpayer, Metropolitan Associates, brought an equal protection challenge to the procedures that taxpayers must follow in order to dispute municipal property tax assessments. After a Wisconsin taxpayer receives its annual property tax assessment, the taxpayer may challenge that assessment before the Board of Review for the municipality where the property is located. If the taxpayer remains dissatisfied after the Board of Review makes its determination, the taxpayer may seek review of that decision in the circuit court. Prior to 2008, a taxpayer could choose between two types of review in the Circuit Court: common law certiorari review or statutory de novo review pursuant to Wis. Stat. § 74.37. Common law certiorari review is a limited review of the record made before the Board of Review, while de novo review is an entirely independent Circuit Court action in which the circuit court creates its own record and gives no deference to the Board of Review’s determination. In 2008, the legislature passed 2007 Wis. Act 86, allowing municipalities to pass an ordinance opting out of de novo review. Taxpayers in these “opt out” municipalities are restricted to a new form of Circuit Court review referred to as “enhanced certiorari review,” broader in scope than traditional certiorari review but narrower in scope than de novo review.

Metropolitan Associates brought a class action lawsuit against the city of Milwaukee seeking a declaratory judgment that 2007 Wis. Act 86 violated the equal protection provisions of the Wisconsin and United States Constitutions. The Wisconsin Supreme Court reversed the Court of Appeals and held that 2007 Wis. Act 86 was unconstitutional because taxpayers in “opt out” municipalities received significantly different treatment than that of taxpayers in other municipalities, and that the difference in treatment lacks a rational basis. In a dictum, the Supreme Court said that neither a de novo action nor a certiorari proceeding contains a jury trial right. Metropolitan Associates v. City of Milwaukee, 332 Wisc. 2d 85, 796 N.W 2d. 717 (March 25, 2011).

NORTH CAROLINA – Property Tax Commission acted reasonably in making downward adjustment to capitalization rate in mall valuation: Both Blue Ridge Mall and Henderson County, where the mall is located, appealed from a decision of the North Carolina Property Tax Commission valuing the mall property at $9,461,476 for the tax year 2007, in which a general reappraisal of all property in the County was made. The County appraised the market value of the mall property at $11,898,600 for 2007, using the cost approach to value the property “as set forth in its schedule of values.” The County stated that the land values in its schedule of values were based on comparable sales and that the building values in its schedule of values were based on “base costs, adjustments for various features and depreciation.” The taxpayer’s appraiser relied on the income capitalization approach with a capitalization rate of 12 percent to arrive at a market value of $7,735,000. The Commission found that the income capitalization method should be used to determine the market value of the property and that the direct capitalization method was the most appropriate method, but made a downward adjustment to the capitalization rate employed by the taxpayer’s appraiser to 10.5 percent to arrive at a market value of $9,461,476. In arriving at the 12 percent rate, the taxpayer’s appraiser had relied most heavily on the sale of a mall which was 50 percent older than the Blue Ridge Mall and had been sold after the appraisal date of the property. The Appellate Court observed that “[t]he capitalized value of a given income stream varies directly with the amount of income and inversely with the capitalization rate,” that the capitalization rates from sales of malls “most comparable” in the appraiser’s report ranged from 8.94 percent to 17.34 percent and that the Commission’s capitalization rate of 10.5 percent was within the range of those rates, and held that the Commission’s downward adjustment to the capitalization rate was reasonable. The Court rejected the County’s contention that even in years in which a general reappraisal is made, merely following its schedule of values was sufficient to show that the taxpayer had failed to rebut the presumption of correctness afforded a tax assessment. The Court held that in appeals taken in years in which the County makes a general reappraisal of its property, once the taxpayer offers evidence of true value of its property through the report of an independent appraiser, the burden shifts to the County to prove that the valuation methods it employed produced a fair estimate of true value, and Henderson County failed to meet that burden. In re Appeal of Blue Ridge Mall LLC, 713 S.E. 2d 779 (N.C. App., August 2, 2011).

CALIFORNIA – For purposes of capitalization of income approach determination of taxable value, originally negotiated term of each local cable franchise, rather than the stated term, was the “reasonably anticipated term of possession.” Charter Communications, a cable television company, brought an action against the County for property tax refunds for unexpired cable franchises, challenging the term of possession the County used in assessing franchise agreement values. Charter objected to the use of a “reasonably anticipated term of possession” longer than the remaining years of the stated term of each franchise agreement. The county tax assessor must value property at its fair market value, and to arrive at the fair market value of a television cable franchise, the assessor must determine its reasonably anticipated term. Rule 21, subdivision (d)(1), Title 18 of the California Code of Regulations, provides as follows: “The term of possession for valuation purposes shall be the reasonably anticipated term of possession. The stated term of possession shall be deemed the reasonably anticipated term of possession unless it is demonstrated by clear and convincing evidence that the public owner and the private possessor have reached a mutual understanding or agreement, whether or not in writing, such that the reasonably anticipated term of possession is shorter or longer than the stated term of possession. If so demonstrated, the term of possession shall be the stated term of possession as modified by the terms of the mutual understanding or agreement.”

The Assessment Appeals Board, in compliance with Rule 21, found clear and convincing evidence of a mutual understanding between the County and the owner of franchises that the reasonably anticipated terms of possession of the franchises were longer than their stated terms of possession, the trial court agreed, and the Court of Appeal affirmed. The County Assessor testified she was not aware of any franchise agreement in the State that had not been renewed, and that in San Luis Obispo, “Charter is the only game in town. They are the only people with cable in the ground.” Charter Communications stated in its Form 10-K filed with the Securities and Exchange Commission that it had “sufficient experience with the local franchise authorities where it acquired franchises to conclude substantially all franchises will be renewed indefinitely,” and the assessor testified that her communications with local authorities confirmed this understanding. Although the remaining years of the unexpired franchises agreements in question varied from four to ten years, the Superior Court found that the terms of the agreements was indefinite. Charter Communications Properties v. County of San Luis Obispo, 198 Cal. App. 4th 1089, 131 Cal. Rptr. 3d 455 (Cal. App. 2nd Dist. , August 30, 2011).

CONNECTICUT – Failure to follow USPAP does not require exclusion of appraiser’s testimony: In a trespass action brought against a neighboring landowner, the plaintiff produced “before” and “after” appraisals showing that the value of his property had decreased by $150,000 as a result of the neighboring landowner’s removal of trees on the plaintiff’s property. The neighboring landowner did not produce his own appraisal, arguing instead that the plaintiff’s expert was not qualified as an expert because she had not followed USPAP in the preparation of her appraisal. The neighboring landowner cited to certain requirements specified in Connecticut General Statutes § 20-504, which provides that the commissioner of consumer protection may adopt reasonable regulations which “shall require any real estate appraiser to comply with generally accepted standards of professional appraisal practice as described in the Uniform Standards of Professional Appraisal Practice issued by the Appraisal Standards Board of the Appraisal Foundation. . . .” The Appellate Court held that the appraiser’s failure to satisfy USPAP in a certain manner did not require the exclusion of her testimony, noting that Connecticut trial courts have “wide discretion in admitting expert testimony.” Caciopoli v. Lebowitz, 131 Conn. App. 306, 26 A.3d 136 (September 6, 2011).

KANSAS – Court of Appeals rejects Court of Tax Appeals valuation of oil and gas leaseholds in flush production: EOG Resources, Inc. appealed from a decision of the Kansas Court of Tax Appeals establishing the value for ad valorem tax purposes of six oil and gas leasehold interests located in Seward County for tax years 2007 and 2008. EOG argued that the Court of Tax Appeals improperly failed to exclude the phenomena of flush production in determining both the annual production rate and the proper rate of decline for new wells on these six leases.

Ad valorem taxation of oil and gas leases differs from that of most other personal property in that the assessment is based on the present worth of the lease’s future production. The determination of the fair market value of a lease necessarily requires consideration of the expected future income potential of a lease, including the age and probable life of the wells on the leased property. A valuation problem arises when a new well is completed because initially, it will ordinarily produce at a far greater rate than will be customary for that particular well after only a few weeks or months have elapsed. This initial excessive production is referred to as “flush production” and, if used as one of the factors for determining value, is misleading and often results in excessive valuation and assessment for the initial year of taxation. In order to address this problem, K.S.A.2010 Supp. 79-331 (b) mandates special treatment of new wells with initial production achieved after July 1 of the year preceding valuation by applying a 40 percent reduction in the amount of production that would have been achieved if the new well had produced the entire year prior to the valuation date.

EOG had a well which first produced oil on December 8, 2006, only 24 days before the January 1 valuation date, so all of its production prior to the valuation date was so-called “flush” production. In order to value the lease, the Court of Appeals determined that post-valuation date production data prior to April 1 of the tax year must be considered, and the Court annualized production based on well yields from December 8 to March 31. The Court applied the 40 percent statutory reduction required by K.S.A.2010 Supp. 79-331 (b) to that annualized yield, and only then applied a decline rate, based upon the production data presented by EOG, of 50 percent to the annualized yield. The Court also rejected the County’s use of an assumed standard 30 percent decline rate, because all available data demonstrated an actual rate of decline that exceeded the assumed standard rate, and held that the decline rate should be applied after – not prior to – the K.S.A.2010 Supp. 79-331 (b) statutory reduction. In re EOG Resources, Inc., __ P.3d __, 2011 WL 5438919 (Kan. App., November 10, 2011).

WEST VIRGINIA – Poultry manufacturer contracting with independent farmers to provide facilities and labor to raise its chickens is not “producer of agricultural products” entitled to exemption: Pilgrim’s Pride is a poultry production business who ships newly hatched chicks to third party farmers to raise, and once mature, transports the fully grown chickens to its processing plants for slaughter. The third party growers provide facilities and labor during the “grow out” process, but Pilgrim’s Pride retains title to the birds and provides a special proprietary chicken feed and all necessary medical care. Pilgrim’s Pride sought exemption from personal property tax in 2009 as a “poultry farmer” under W. Va. Code § 11-3-9 (a) (28) (2008), which provides tax relief for property used for the “subsistence of livestock” and a “farm or farm operation.” In evaluating the request, the County Assessor sought assistance from the State Tax Commissioner, who ruled that the exemption applied “only to the extent that Pilgrim’s Pride has live poultry on its premises on July 1st of any tax year.” Because the primary use of Pilgrim’s Pride’s land and fixtures was for a vertically-integrated poultry processing plant rather than farming, the Commissioner concluded that the taxpayer was not entitled to the “farm” exemption.

Although Pilgrim’s Pride’s personal property is used exclusively in agriculture and it sells exclusively agricultural products, the property was not used on a farm or farming operation. The Court explained that “the fact that the processing plant is used to put agricultural products into commerce as a result of the slaughtering that takes place inside that building does not fulfill the overarching requirement for entitlement to the ‘farm’ exemption – that the land on which that building is located is used primarily for farming purposes – in this case, for the breeding and management of chickens.” The Court agreed with the Commissioner that because the chickens and the feed are “produced by growers elsewhere, it cannot be said that the land is being utilized to produce agricultural products.” The Court rejected Pilgrim’s Pride’s attempt to distinguish itself from a third-party food processor—an entity for which the “farm” exemption is unavailable – by citing its ownership of the birds it processes “from egg to packaged chicken meat.” Ownership, said the Court, does not address the critical statutory element of whether Pilgrim’s Pride is the “producer” of the chickens. The Court also held that Pilgrim’s Pride was entitled to claim the “subsistence of livestock” exemption in connection with its hatchery operation, but not with regard to personal property used at its live haul center and feed mill operation, because the chickens were not “on hand” in connection with the latter at the commencement of the assessment year as required by W. Va. Code § 11-3-9 (a) (21). Pilgrim’s Pride Corporation v. Morris __S.E.2d__, 2011 WL 5827624 (W.Va., November 17, 2011).

INDIANA – County Assessor improperly relied on sale-leaseback transaction in establishing “market value in use” of movie theater: Kerasotes owns a 12-screen multiplex movie theater on seven acres of land in Grant County, Indiana. In 2005, Kerasotes sold the theater, along with sixteen other theaters it owned throughout the Midwest, in a portfolio transaction to Crest Net Lease, Inc., allocating $7,821,835 to the sale of the subject property. As part of the transaction, Kerasotes agreed to lease back the theaters, paying Crest Net an annual rent of $633,569 (or $17.70 per square foot) for the subject property. For 2006, the Gant County Assessor assigned the theater an assessed value of $6,137,800, which the Grant County Property Tax Assessment Board of Appeals increased on appeal to $7,821,000.

Kerasotes filed an appeal of the assessment with the Indiana Board. Kerasotes’ appraiser determined that the market value-in-use of the theater was $4,200,000, while the County’s appraiser valued the property at $7,450,000. The Indiana Board reduced the assessment to $4,200,000, and the Tax Court affirmed. The Court rejected the County appraiser’s reliance on the subject property’s allocated sales price and contractual rent in his income approach analysis to arrive at his value. The County appraiser maintained that because sale-leaseback transactions were the norm within the industry, such transactions presented the best data by which to gauge true market rental rates for movie theaters. Kerasotes’ appraiser testified that sale-leaseback transactions, although prevalent in the movie theater industry, are typically used as financing tools and, as a result, often represent the sale of more than just the value of the real property involved. He explained that all seventeen properties sold in the portfolio transaction were fully equipped and had, for the most part, been in operation under the Kerasotes brand name for at least five years. Kerasotes’ appraiser valued the property under the income approach using income data that represented the “traditional” theater rental market, not sale-leaseback transactions, in arriving at the lower value. The Court agreed that under Indiana’s market value-in-use standard, the subject property should be valued according to its market rent despite the fact that its contract rent was much higher. Grant County Assessor v. Kerasotes Showplace Theaters, LLC, 955 N.E.2d 876 (October 20, 2011).

SOUTH DAKOTA – Use tax imposed on railcar repair company’s tangible personal property does not violate Railroad Revitalization and Regulatory Reform Act: The federal Railroad Revitalization and Regulatory Reform Act, 49 U.S.C. § 11501 (b) (4), prohibits discriminatory taxes against rail carriers. The Eighth Circuit Court of Appeals recently held that a South Dakota sales and use tax on repair services and tangible personal property used in those repairs does not violate the Act even though it applies to personal property used in railcar repairs but not to “tangible personal property used to repair aircraft.” The taxpayer, Midwest Railcar, does not provide rail cars to railroad companies, but rather services such property by providing repairs and maintenance. Midwest Railcar is a private repair company, unaffiliated with any rail carrier, and there was no evidence that the majority of rail carriers contract with Midwest Railcar. Any discriminatory treatment of railcar repair companies by South Dakota’s use tax scheme did not violate catch-all provision of Railroad Revitalization and Regulatory Reform Act. Midwest Railcar Repair, Inc. v. South Dakota Dept. of Revenue and Regulation, 659 F.3d 664, (8th Cir., October 14, 2011).