Saturday, August 30, 2014

Appreciation for Depreciation

Vermont Transco LLC v. Town of Vernon, 2014 VT 93

By Andrew Delaney

I’ve never developed a taste for property tax law. But this case seems like it might’ve been interesting to litigate. The actual real property involved is worth but a very small percentage of the total assessment. This is almost all about the equipment and lines.

Taxpayer owns “five electrical substations, seven transmission lines, a fiber-optic line, land, and utility easements located within the Town of Vernon.” The town listers valued the property at $92 million and change. Taxpayer appealed to the Board of Civil Authority, which upheld the valuation. Taxpayer then appealed to the state appraiser. 
 
The primary issue at that level “was the correct method of calculating depreciation with respect to the electrical equipment that comprises almost the entire value of the property.” There was also a dispute about whether easements and rights of way should be included in the valuation.

The state appraiser found the total value of the property to be $92 million and change—same as the town. The state appraiser went with the town’s replacement-cost-new-with-straight-line-depreciation reasoning on valuation. The state appraiser didn’t address taxpayer’s easements-can’t-be-taxed and first-year-operation-depreciation-should’ve-been-factored-in arguments. Taxpayer appealed.

Taxpayer’s four arguments, grossly oversimplified, are: (1) the state appraiser should have used the “Iowa Curve” depreciation method because the SCOV used that method in a previous case involving its predecessor; (2) the state appraiser’s fair-market-value determination doesn’t take into account the core factual issues; (3) the state appraiser should’ve depreciated assets during the first year of service; and (4) utility easements shouldn’t have been included in the total value.

On appeal to the state appraiser, the town’s appraisal is presumed to be valid and legal unless the taxpayer shows that property was assessed above fair market value, which makes the presumption go bye-bye. Then the town has to show it was substantially compliant or that it had independent evidence of fair market value. Ultimately, it’s the taxpayer’s burden to show the appraisal was wrong.

The SCOV defers to the state appraiser’s findings of fact, but does whatever it feels like with legal conclusions.

The majority mentions that this is “the second time in less than fifteen years that the state appraiser and this Court have considered the depreciation schedule and appraised value of taxpayer’s transmission equipment and realty within the Town.” In the previous case, the SCOV “affirmed the state appraiser on the ground that as the fact finder, the state appraiser exercised his discretion appropriately in choosing the Iowa Curve method over straight-line depreciation.”

Taxpayer’s accountant testified before the state appraiser that “in the valuation taxpayer submitted to the Town it used the Iowa Curve method to calculate depreciation” assigning “each piece of equipment to a thirty- or forty-year curve” and calculating a depreciated value on that basis. This resulted in an equipment value of roughly $80.9 million.

Taxpayer also brought in a professional appraiser as an expert. He used a cost basis and “straight-line depreciation over periods ranging from forty-seven-and-a-half to sixty years for different classes of equipment.” His valuation of the equipment was about $79.8 million. He didn’t use the Iowa curve and said more or less that he’d never seen it used in this method.

The town’s expert-witness appraiser also went with the cost basis and straight-line depreciation method, but he “used longer periods of estimated future life for the equipment, ranging from sixty-five to ninety years.” His valuation of the equipment was $91 million. He more or less said the Iowa Curve is junk for tax-assessment purposes. The state appraiser figured the town’s method was most persuasive and adopted that valuation.

Here, the majority notes that determining the appropriate method for arriving at fair market value is within the state appraiser’s discretion. Taxpayer’s argument is that the state appraiser had to use the Iowa Curve because of the previous case.

The majority concludes that taxpayer didn’t properly preserve the issue for appeal. “At no point did taxpayer argue below that the state appraiser was required to use the Iowa Curve method, or that the Town was precluded or estopped from arguing for the use of a different depreciation method.” So, because taxpayer failed to preserve the issue, the majority doesn’t get into it.

Taxpayer’s next argument is that the state appraiser’s adoption of the town’s valuation methods without making any specific findings regarding lifespan of the equipment. The state appraiser’s decision essentially said the town’s approach to valuation seems more legit, and left it at that. That’s not good enough, and the SCOV kicks it back “for further findings on lifespans to be used for calculating depreciation.”

Taxpayer’s argument for first-year depreciation does not fare as well. Here the majority reasons that the state appraiser did not abuse its discretion in “declining to accept taxpayer’s argument.” The town presented evidence below that taxpayer’s approach violated long-standing and accepted accounting practices, and so the majority reasons that declining taxpayer’s proposal was within the state appraiser’s discretion. The majority goes through a couple cases cited by taxpayer and distinguishes them. I don’t feel similarly inclined. There’s a link at the top of the page if you’re looking for that kind of party.

Now, on inclusion of the easements, taxpayer wins. The SCOV has previously held that easements aren’t subject to municipal property tax. The majority points out the practical impossibility of identifying, valuing, and taxing easements in a reliable and efficient manner. Just can’t do it, kids. While there’s a certain logic to it in this case—the easements are pretty big and obvious—without a statutory singling out certain easements, the majority is sticking with the we-don’t-tax-easements-‘cause-it’d-be-a-giant-pain-in-the-patootie principle.

Justice Robinson concurs entirely, but writes “separately to flag an issue that warrants consideration by the legislative and executive branches.” Justice Robinson would like to see some mandated uniformity in assessing electric facilities because there doesn’t seem to be any uniformity present. Oh, it’s much more nuanced than that, but we do basic ideas here.

Justice Dooley concurs and dissents, focusing on the potential problems with appointed hearing officers making decisions in high-value complex cases such as this one. The state appraiser’s decision was “five pages of recitations of the evidence, followed by a short conclusory statement” that the town’s expert was more persuasive than taxpayer’s. Recitations on the evidence are not findings of fact. This, according to the dissent, cannot stand and no part of the decision should be upheld. “This case raises a strong question as to whether the administrative process is up to the decisionmaking that is called for.” Again, the dissent is much more nuanced than that, but the gist of it is there.

Does anyone else think “Iowa Curve” sounds like something you do with a surfboard in a cornfield?

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