Board of Equalization of Salt Lake County v. Utah State Tax Com'n ex rel. Benchmark, Inc.

• Decision Date: 18 November 1993
• Docket Number: No. 910310,910310
• Citation: 864 P.2d 882
• Parties: BOARD OF EQUALIZATION OF SALT LAKE COUNTY, State of Utah, Petitioner, v. UTAH STATE TAX COMMISSION ex rel. BENCHMARK, INC., Respondents.
• Court: Utah Supreme Court

Page 882

864 P.2d 882

BOARD OF EQUALIZATION OF SALT LAKE COUNTY, State of Utah, Petitioner, v. UTAH STATE TAX COMMISSION ex rel. BENCHMARK, INC., Respondents.

No. 910310.

Supreme Court of Utah.

Nov. 18, 1993.

David E. Yocom and Bill Thomas Peters, Salt Lake City, for petitioner.

R. Paul Van Dam, Atty. Gen. and Leon A. Dever, Asst. Atty. Gen., for the Com'n.

Robert A. Peterson, Salt Lake City, for Benchmark.

HOWE, Associate Chief Justice:

The Board of Equalization of Salt Lake County seeks review of a final order of the Utah State Tax Commission determining the fair market value of 44 residential building lots owned by Benchmark, Inc., for purposes of ad valorem taxation.

FACTS

Benchmark is the owner and developer of Benchmark Subdivision located on the east side of Foothill Boulevard in Salt Lake City overlooking Interstate Highway 80. The subdivision consists of 118 lots, 74 of which Benchmark had previously sold to individual purchasers. For the years 1987, 1988, and 1989, the Salt Lake County Assessor used the comparable sales method to value the remaining 44 lots. The assessment of each lot was based on its retail value--its value if "sold on the open market." The retail value is not in serious dispute. ¹ The Board of Equalization upheld the assessment.

Benchmark appealed to the Commission, contending that the retail value of the lots should be discounted to allow for an absorption period. As with any developer, Benchmark invested capital in the subdivision lots fully expecting to sell them over an extended period of time. As a practical matter, it is highly unlikely that all of the lots can be sold in a single tax year if sold individually. By determining the rate at which the lots will sell per year and discounting to present value the amount those future sales will yield, absorption valuation recognizes the time value of such an investment in multiple lots. The absorption period represents the number of years it will take Benchmark to sell all of the remaining 44 lots. In addition, absorption valuation recognizes the existence of certain transactional and holding costs incurred by a developer during the absorption period and deducts them from the retail value of the lots. These costs include marketing commissions, closing costs, real estate taxes, and other miscellaneous expenses, i.e., maintenance and weed control. Finally, it should be noted that absorption valuation, unlike the comparable sales method, yields the fair market value of the 44 subdivision lots if they are all sold together. The method contemplates a "hypothetical sale in bulk from one developer to another."

Howard Layton, an MAI appraiser who had appraised the lots in question for Benchmark, testified at the hearing before the Commission. Based on his appraisal, Layton outlined six steps to determine the value of property according to the absorption method:

1. Estimate the retail value/price of the proposed subject lots.

2. Estimate the sales performance or absorption time, including positive or negative change in price over time.

3. Estimate the costs incurred during the marketing or holding period.

4. Estimate the proper entrepreneurial profit ... necessary to attract a person to be willing to purchase the subdivision or group of lots.

5. Determine an appropriate discount rate.

6. [P]roject the cash flow over the marketing period and discount the net cash flow to a single present dollar value estimate.

The Commission found that Benchmark's projected absorption period, eight years, was reasonable and that "the value of a lot sold today for a given price is greater than the value of a lot sold years into the future for the same price." Following its prior decisions, the Commission fixed the value of the lots according to the absorption method of appraisal, concluding that "for property which contains a number of parcels too numerous to be sold at fair market value within one year, an absorption adjustment must be made to allow for the time value of the investment in the property."

The Board appeals from the Commission's determination. The issue before us is whether applying an absorption discount to the lots in question is consistent with the Utah Constitution and with the Utah statutory scheme for ad valorem taxation.

STANDARD OF REVIEW

The legislature recently codified the standard of review to be applied by this court when reviewing formal adjudicative proceedings before the state tax commission. Utah Code Ann. § 59-1-610(1) (Supp.1993). This section became effective on May 3, 1993, and "supersede[d] section 63-46b-16 pertaining to judicial review of formal adjudicative proceedings." § 59-1-610(2). Although this action commenced before the effective date, we find that section 59-1-610(1) applies.

We held in Pilcher v. Department of Social Services, 663 P.2d 450 (Utah 1983), that "procedural statutes enacted subsequent to the initiation of a suit which do not enlarge, eliminate, or destroy vested or contractual rights apply not only to future actions, but also to accrued and pending actions as well." Id. at 455. Standard of review is "a matter of procedural, rather than substantive, law," State v. Thurman, 846 P.2d 1256, 1267 (Utah 1993), and section 59-1-610 does not "enlarge, eliminate or destroy" the vested or contractual rights of any party to this case. Therefore, section 59-1-610 governs our review in this case. OSI v. Utah State Tax Comm'n, 860 P.2d 381 (Utah Ct.App.1993) (using this reasoning to apply section 59-1-610 retroactively).

The Commission's decision raises questions of law. Section 59-1-610 provides that we "grant the commission no deference concerning its conclusions of law, applying a correction of error standard, unless there is an explicit grant of discretion contained in a statute at issue before the appellate court." Utah Code Ann. § 59-1-610(1)(b) (Supp.1993). No discretion has been granted to the Commission in interpreting the state constitution or the statutes relevant to this case. Therefore, the "no deference" standard applies. In short, the Commission's experience and expertise is "of no real assistance" in resolving questions of constitutional law and statutory construction. Zissi v. State Tax Comm'n, 842 P.2d 848, 853 n. 2 (Utah 1992).

CONSTITUTIONAL ANALYSIS

Article XIII, section 2(1) of the Utah Constitution provides:

All tangible property in the state, not exempt under the laws of the United States, or under this Constitution, shall be taxed at a uniform and equal rate in proportion to its value, to be ascertained as provided by law.

Section 3 of the same article provides in part:

The Legislature shall provide by law a uniform and equal rate of assessment on all tangible property in the state according to its value in money.... The Legislature shall prescribe by law such provisions as shall secure a just valuation for taxation of such property, so that every person and corporation shall pay a tax in proportion to the value of his, her, or its tangible property.

These two sections expressly require that property be taxed according to "its value" and "its value in money." In State ex rel. Cunningham v. Thomas, 16 Utah 86, 90, 50 P. 615, 615-16 (1897), we construed this language to mean that property should be valued "as near as is reasonably practicable, at its full cash value; in other words, the valuation for assessment and taxation shall be, as near as is reasonably practicable, equal to the cash price for which the property valued would sell in the open market." Utah Code Ann. § 59-2-102(7) defines "fair market value" as the "amount at which property would change hands between a willing buyer and a willing seller, neither being under any compulsion to buy or sell and both having reasonable knowledge of the relevant facts."

Despite these judicial and statutory definitions, "market value" remains a fluid standard. For this reason, section 3 of article XIII "confers on the Legislature power to provide for just valuations." Rio Algom Corp. v. San Juan County, 681 P.2d 184, 191 (Utah 1984). As interpreted, section 3 allows the legislature considerable latitude in the methods or formulae used to determine "market value." Id. We wrote in United States Smelting, Refining, & Mining Co. v. Haynes, 111 Utah 172, 176 P.2d 622 (1947):

It will be observed that these provisions [sections 2 and 3 of article XIII] require that all tangible property ... shall be subjected to a uniform and equal rate of assessment according to its value in money. The method or yardstick by which the valuation in money is to be determined shall be prescribed by the legislature. It is not required that the same yardstick or method of determining value shall be used with respect to all kinds of property. But the different formulae that may be applied to different kinds of property must be such that they aim and tend to secure for assessment purposes a valuation fair and equitable in comparison with and commensurate with valuation of other kinds of property.

Id. at 181, 176 P.2d at 627.

Discounts from fair market or cash value are not unconstitutional per se. See Utah Code Ann. § 59-2-304(1) (1992). However, to pass constitutional muster, a discount must be applied uniformly and equally to all property assessed according to the same method of appraisal. Otherwise, the burden of taxation is not shared in proportion to the value of property owned. Utah Const. art. XIII, §§ 2, 3. To clarify the application of this rule, we must examine in detail two of our prior decisions.

In Rio Algom Corp., the plaintiffs, owners of state-assessed properties, challenged the constitutionality of the statutory discount in Utah Code Ann. § 59-5-4.5 (1981) (current version at Utah Code Ann. § 59-2-304). This provision discounted by 20 percent the value of all county-assessed property appraised by the comparable sales or the cost method. The discount represented "various fees, services, closing costs, and other expenses...