Albemarle Elec. Membership Corp. v. Alexander

• Decision Date: 13 December 1972
• Docket Number: No. 7,7
• Citation: 282 N.C. 402,192 S.E.2d 811
• Parties: ALBEMARLE ELECTRIC MEMBERSHIP CORPORATION et al. v. Thomas W. ALEXANDER et al.
• Court: North Carolina Supreme Court

Page 811

192 S.E.2d 811

282 N.C. 402

ALBEMARLE ELECTRIC MEMBERSHIP CORPORATION et al. v. Thomas W. ALEXANDER et al.

No. 7.

Supreme Court of North Carolina.

Dec. 13, 1972.

Robert Morgan, Atty. Gen. by Myron C. Banks, Asst. Atty. Gen., for respondents.

Crisp & Bolch by Thomas J. Bolch and William T. Crisp, Raleigh, for petitioner-appellants.

BRANCH, Justice.

Appellants contend the State Board of Assessment employed an erroneous method in valuing their property which resulted in their property being valued substantially in excess of its true money value, thereby imposing a confiscatory tax in violation of § 17, Art. 1 (now § 19, Art. 1) of the North Carolina Constitution and the Fifth and Fourteenth Amendments of the United States Constitution.

The provisions of G.S. § 105--271, et seq. constitute the State Board of Assessment appraisers and assessors of the property of public utilities and electric membership corporations for the purpose of ad valorem taxation.

Black's Law Dictionary defines the word 'assess' as follows: 'In connection with taxation of property, (assess) means to make a valuation and appraisal of property, usually in connection with listing of property liable to taxation, and implies the exercise of discretion on the part of officials charged with duty of assessing, including the listing or inventory of property involved, determination of extent of physical property, and placing of a value thereon. Montana-Dakota Power Co. v. Weeks, D.C.N.D., 8 F.Supp. 935, 936. To tax. Johnson City v. Clinchfield R. Co., 163 Tenn. 332, 43 S.W.2d 386, 387.'

G.S. § 105--358, (since revised and recodified as G.S. § 105--336) as applied to appellants, specifically provided for the ascertainment of true value of their property by adding the equity (value of capital) and the debt (aggregate amounts of any mortgage or mortgages).

Appellants argue that the Board should have considered the Value of their respective mortgage indebtednesses rather than the Amount of such mortgage indebtednesses.

In this connection the Board heard the testimony of Mr. Gwyn Price, Chairman of North Carolina's Rural Electric Authority from its inception to his retirement in 1972, who testified: 'I don't think the employment by the Board of the REA mortgage debt factor is a proper method to use in arriving at these values. I think that it should be supplemented, Mr. Chairman, with other data and with other information; particularly do I think it should be supplemented with some rate of return.' (Our emphasis)

Harry B. Caldwell, an outstanding agricultural leader and the Executive Vice-President of the Farmers Cooperative Council, outlined the history and philosophy of the REA. He questioned the wisdom of using the mortgage indebtedness as a factor in determining true value.

The witness Clyde T. Ellis, Manager Emeritus of the National Rural Electric Cooperative Association, stated that in his opinion the use of the mortgage debt of the electric membership corporations was not valid as a fair and proper base for the computation of true value of property.

W. R. Underhill, a Utilities Evaluation Analyst for the State Board of Assessment, stated that 'if we could have determined the market value of REA debt and the market value of the remaining equity, that would have been the market value, but we feel that it's impossible to do so.'

Mr. Joe Mayes, a partner of Southern Engineering Company, testified that his experience in evaluating electric membership property was limited to forced sales situations. He recommended depreciated book value plus materials and supplies factors for non-revenue producing items and capitalized earnings as the major components of a better formula for ascertaining the true value. This formula, he suggested, should be averaged over a period of time greater than the two-year period employed by the Board in valuing appellants' property. In his opinion mortgage indebtedness was a 'skew factor.'

REA was created to meet a need that investor-owned utilities could not profitably meet. The Congress adopted a policy which allowed 2% Interest loans to be granted upon security which would not have attracted private capital. An electric membership bership corporation is a non-profit service organization created to carry central electric service to sparsely settled rural areas. Considering these factors with the available market, if there should be a sale of an electric membership corporation, it becomes fairly obvious that there is firm basis for appellants' contention that generally the amount of the mortgage debt and equity of a membership corporation may in many cases exceed the value of the mortgage debt and equity.

We do not, however, intend to say that the statutory formula was without any value in determining the true value of appellants' property. We do think the Board wisely followed the procedure approved by the witness Gwyn Price and used other factors widely recognized as proper in determining true value of similar property. Further, we note that after the Board averaged the three factors they reduced the result by 5%. Nevertheless, appellants attack the additional factors used by the Board to supplement the statutory directions for determining true cash value of the membership property.

They first contend that the capitalization of their earnings at less than 7--8% Was erroneous.

We consider cases from other jurisdictions which are pertinent to this contention.

In the case of Chicago and North Western Railway Co. v. Prentis, Iowa, 161 N.W.2d 84, the tax commission had for several years been capitalizing income at the rate of 6%. Plaintiff objected to the use of this rate and offered witnesses who testified that the proper percentage should be 6 1/2%, 7 1/2% And 8%. The court held that the taxpayer's burden is not met by showing a difference of opinion, but that the taxpayer must show the action of the commission in following its long established rate was arbitrary and capricious. Consequently, the 6% Rate was approved.

Another jurisdiction considered the same question in Pleasant v. Missouri-Kansas-Texas R. Co., 66 F.2d 842 (10th Cir. 1933). There the court stated the tax commission capitalized the taxpayers' net revenues on a 6% Basis, and the master had used 7%. The court held that both percentages were in the 'zone of reason', and that there was no error in the use of the 6% Rate.

In this connectionthe witness Underhill

In this connection the witness Underhill to the figure of 6% In calculating utility property until the rise in interest rates. Recently, the Board has used higher capitalization rates for higher risk companies but retained the 6% Rate for determining value of properties belonging to electric membership corporations.

The witness Mayes testified he would have employed a figure of 7 or 8% In capitalizing the earnings. Referring to these percentages he further testified:

'I would have to put many things in and weigh them and this would be my judgment and I think this is a judgment figure. I am convinced in my own mind that This is generally a judgment figure.' (Our emphasis)

Appellants seek to support their argument for a higher capitalization rate by offering evidence that the North Carolina Utilities Commission has approved a rate of return of 7.75% For Duke Power Company. Duke Power Company differs from appellants in that it is investor owned, seeks to make a profit for its investors, must obtain its financing in the 'money markets' and there pay such interest rates as prevailing circumstances require. Recognizing the difference between investor-owned companies and electric membership corporations, we find little probative force in the evidence that the North Carolina Utilities Commission allowed Duke Power Company a 7.75% Rate of return.

Here the evidence discloses that the Board has historically used the figure of 6% In determining true value of the property owned by electric membership corporations, and that the determination of the rate is a matter of judgment. We find nothing in the record which indicates that the Board departed from the 'zone of reason' or acted arbitrarily in adopting the 6% Capitalization rate.

We have briefly outlined some of appellants' major contentions asserting error in the method used by the Board to find the true value of appellants' property. We do not deem it necessary to discuss all of these contentions since an erroneous method of determination, standing alone, will not be decisive of this appeal. In order to obtain relief appellants must show that the methods used in determining true value were illegal and arbitrary, And that appellants were substantially injured by a resulting excessive valuation of their property.

The primary consideration in assessing an ad valorem tax is property valuation. The fundamental rule of valuation is actual market or fair cash value. 51 Am.Jur. Taxation, § 696; 84 C.J.S. Taxation § 410. The North Carolina General Assembly has adopted 'market value' or 'true value in money's as the uniform appraisal standard for valuation of property for tax purposes. G.S. § 105--294 (now G.S. § 105--283).

The members of the State Board of Assessment are public officers, and the Board's official acts are presumed to be made in good faith and in accordance with law. The burden is upon the party asserting otherwise to overcome such presumptions by competent...