Whitley Products, Inc. v. State Bd. of Tax Com'rs

• Decision Date: 21 December 1998
• Docket Number: No. 49T10-9701-TA-00048,49T10-9701-TA-00048
• Citation: 704 N.E.2d 1113
• Parties: WHITLEY PRODUCTS, INC., Petitioner, v. STATE BOARD OF TAX COMMISSIONERS, Respondent.
• Court: Indiana Tax Court

Page 1113

704 N.E.2d 1113

WHITLEY PRODUCTS, INC., Petitioner, v. STATE BOARD OF TAX COMMISSIONERS, Respondent.

No. 49T10-9701-TA-00048.

Tax Court of Indiana.

Dec. 21, 1998.

Curtis J. Dickinson, David L. Pippen, Dickinson & Abel, Indianapolis, for Petitioner.

Jeffrey A. Modisett, Attorney General, Vincent S. Mirkov, Deputy Attorney General, Indianapolis, for Respondent.

FISHER, J.

Whitley Products, Inc. (Whitley Products) appeals a final assessment determination of the State Board of Tax Commissioners (State Board) fixing the assessed value of property Whitley Products owns as of March 1, 1992. Whitley Products raises three issues for this Court's determination in this original tax appeal:

1) Did the State Board err in grading the subject improvement?

2) Did the State Board err in denying the subject improvement a kit adjustment?

3) Did the State Board err in denying functional and economic obsolescence to the subject improvement?

FACTS AND PROCEDURAL HISTORY

Whitley Products owns real property in Marshall County, Indiana. This property consists of land and an improvement. The improvement is comprised of three sections, A, B, and C, which were assessed separately.

In 1992, Whitley Products filed a Form 130 Petition for Review of Assessment ¹ with the Marshall County Board of Review (BOR) alleging an error in the base rate and that an improper amount of physical and obsolescence depreciation was applied to the subject improvement. The BOR denied the petition and increased the assessment because it discovered a truck well that had not been assessed. See IND.CODE ANN. § 6-1.1-15-2.1 (West 1989) (amended 1993 & 1997).

On September 15, 1992, Whitley Products filed a Form 131 Petition for Review of Assessment with the State Board. ² On December 18, 1995, the State Board held a hearing on Whitley Products' petition, and on November 22, 1996, the State Board issued its final determination. On January 3, 1997, Whitley Products filed the instant original tax appeal, and on May 29, 1998, the parties tried this cause before the Court. Additional facts will be supplied as necessary.

ANALYSIS AND OPINION

Standard of Review

The State Board is afforded great deference when it acts within the scope of its authority. See King Indus. Corp. v. State Bd. of Tax Comm'rs, 699 N.E.2d 338, 339 (Ind. Tax Ct.1998). Accordingly, the Court reverses final determinations of the State Board only when they are unsupported by substantial evidence, are arbitrary or capricious, constitute an abuse of discretion, or exceed statutory authority. See id.

Discussion

I. Grade

The grading of improvements is an important part of the True Tax Value system. Under that system, assessors use cost schedules to determine the base reproduction cost of a particular improvement. See Garcia v. State Bd. of Tax Comm'rs, 694 N.E.2d 794, 797 (Ind. Tax Ct.1998); Town of St. John v. State Bd. of Tax Comm'rs, 690 N.E.2d 370, 373-74 (Ind. Tax Ct.1997), aff'd in part, rev'd in part, 702 N.E.2d 1034 (Ind.1998). Improvements are then assigned various grades based on their materials, design, and workmanship. See IND. ADMIN. CODE tit. 50, r. 2.1-4-3 (1992) (codified in present form at id. r. 2.2-10-3 (1996)) (Grade is "used to adjust the total base reproduction cost determined by [using the cost schedules] to account for variations in the quality of materials, workmanship, and design."); Barth, Inc. v. State Bd. of Tax Comm'rs, 699 N.E.2d 800, 804 n. 12 (Ind. Tax Ct.1998); Zakutansky v. State Bd. of Tax Comm'rs, 696 N.E.2d 494, 495 n. 1 (Ind. Tax Ct.1998); see also Clark v. State Bd. of Tax Comm'rs, 694 N.E.2d 1230, 1236 & n. 1 (Ind. Tax Ct.1998). The grades represent multipliers that are applied to the base reproduction cost of an improvement as calculated by using the cost schedules provided in State Board regulations. See Zakutansky, 696 N.E.2d at 496 n. 5; Garcia, 694 N.E.2d at 796-97.

Whitley Products challenges the grading of the subject improvement. As noted above, the three sections were graded separately. However, Whitley Products does not make specific arguments with respect to each section. Instead, Whitley Products makes a generalized contention that the State Board failed to take into consideration the quality of the materials and workmanship of the subject improvement when evaluating the grading of the subject improvement. Whitley Products also contends that the State Board's regulations concerning grade fail to provide any ascertainable standards by which this Court and taxpayers may evaluate a determination of grade under the regulations.

With respect to the grading of the subject improvement, the State Board concluded in its final determination:

This building does not qualify as a steel kit building.... However, the overall quality of the materials and workmanship does resemble a steel kit building. To account for the lower cost of construction pursuant to 50 IAC 2.1-4-3(f), the grade of sections B and C has been reduced to D.

(State Bd. Final Determination at 2). The State Board did not alter the C grade already assigned to section A of the subject improvement.

The above-quoted language would seem to undermine Whitley Products' contention that the State Board failed to take the quality of the materials and workmanship into account when arriving at the grade of the subject improvement. ³ However, the evidence offered at trial paints a different picture of how the State Board arrived at the D grade.

At trial, the State Board hearing officer, Ms. Ellen Yuhan, testified that she arrived at the D grade by calculating the deviations of the subject improvement from the model used to develop the cost schedule. Under the regulations, a C grade is given to a

[m]oderately attractive building[ ] constructed with average quality materials and workmanship throughout and conforming with the base specifications used to develop the pricing [cost] schedule. Minimal to moderate architectural treatment. Average quality interior finish with adequate built-in features. Standard grade mechanical features and fixtures.

IND. ADMIN. CODE tit. 50, r. 2.1-4-3(f); see also Clark, 694 N.E.2d at 1235.

When an improvement deviates from the model and associated cost schedule used to assess the improvement, the deviation often has an effect on the reproduction cost of the improvement. See Clark, 694 N.E.2d at 1236-37 & n. 9; Componx v. State Bd. of Tax Comm'rs, 683 N.E.2d 1372, 1375 (Ind. Tax Ct.1997). The preferred method of accounting for this deviation is to use separate schedules that show the costs of certain components and features present in the model. See IND. ADMIN. CODE tit. 50, r. 2.1-4-3(b)-(e) (1992) (codified in present form at id. r. 2.2-10-6.1(b)-(e) (1996)); Clark, 694 N.E.2d at 1236 n. 6; see also IND. ADMIN. CODE tit. 50, r. 2.1-4-10 (1992) (codified in present form at id. r. 2.2-15-1 (1996)). This allows an assessor to adjust the base reproduction cost of the improvement objectively. ⁴ See Barth, Inc., 699 N.E.2d at 802-03; Clark, 694 N.E.2d at 1236 n. 6; Wareco Enters. v. State Bd. of Tax Comm'rs, 689 N.E.2d 1299, 1302 (Ind. Tax Ct.1997); Hatcher v. State Bd. of Tax Comm'rs, 561 N.E.2d 852, 857 (Ind. Tax Ct.1990).

The other means of accounting for an improvement's deviation from the model used to develop the cost schedule is via an adjustment to the grade of the improvement. This type of adjustment requires the assessor's subjective judgment. See Reams v. State Bd. of Tax Comm'rs, 620 N.E.2d 758, 760 (Ind. Tax Ct.1993). Where possible, this type of an adjustment should be avoided. See Clark, 694 N.E.2d at 1236 n. 6. However, because the component (base rate adjustment) schedules are not comprehensive, this type of adjustment may be necessary. See Hatcher v. State Bd. of Tax Comm'rs, 601 N.E.2d 19, 21-22 (Ind. Tax Ct.1992); see also Barth, 699 N.E.2d at 803 n. 8.

According to Ms. Yuhan, the latter method is how the State Board accounted for the deviations of the subject improvement from the model. Upon inspecting the subject improvement, Ms. Yuhan determined that a number of components presumed to exist in the model did not exist in sections B and C of the subject improvement. (Trial Tr. at 30). She then calculated the reproduction cost of the missing components by using the component schedules. This reduced the reproduction cost of the subject improvement by about 20%. (Trial Tr. at 19). This reduction corresponded to the D grade, ⁵ which the State Board adopted in its final determination As for the quality of materials and workmanship, Ms. Yuhan indicated that they were not considered in arriving at the D grade, except for the metal framing and the reinforced concrete. (Trial Tr. at 33). In arriving at the D grade, Ms. Yuhan started by assuming that but for the deviations from the model, the C grade was appropriate. (Trial Tr. at 30). Ipso facto, this means that she considered the quality of the materials and workmanship to be average.

for sections B and C of the subject improvement. ⁶

This is inconsistent with the State Board's final determination, which refers to the quality of materials and workmanship as being a reason for the reduction in grade. Previous decisions of this Court and the Indiana Court of Appeals have long stressed the need for the State Board to outline its reasoning in its written findings. ⁷ See Barth, Inc., 699 N.E.2d at 802 n. 6; Zakutansky, 696 N.E.2d at 495 n. 2; Loveless Constr. Co., 695 N.E.2d at 1050 n. 8; Alte Salems Kirche v. State Bd. of Tax Comm'rs, 694 N.E.2d 810, 814 n. 4 (Ind. Tax Ct.1998); Canal Square Ltd. Partnership v. State Bd. of Tax Comm'rs, 694 N.E.2d 801, 810 (Ind. Tax Ct.1998); Clark, 694 N.E.2d at 1243 n. 23; Indianapolis Historic Partners v. State Bd. of Tax Comm'rs, 694 N.E.2d 1224, 1226-27 n. 3; 20th Century Fiberglass v. State Bd. of Tax Comm'rs, 683 N.E.2d 1376, 1377 (Ind. Tax Ct.1997); Scheid v. State Bd. of Tax Comm'rs, 560 N.E.2d 1283, 1284 (Ind. Tax Ct.1990); State Bd. of Tax...