Brooklyn Union Gas Co. v. State Bd. of Equalization and Assessment
| Decision Date | 09 July 1985 |
| Citation | 65 N.Y.2d 472,492 N.Y.S.2d 598 |
| Parties | , 482 N.E.2d 77 In the Matter of BROOKLYN UNION GAS COMPANY, Respondent, v. STATE BOARD OF EQUALIZATION AND ASSESSMENT, Appellant, and City of New York, Intervenor-Appellant. In the Matter of NATIONAL FUEL GAS DISTRIBUTION CORPORATION et al., Respondents, v. STATE BOARD OF EQUALIZATION AND ASSESSMENT, Appellant, and Niagara-Wheatfield Central School District, Intervenor. (And Nine Other Proceedings.) |
| Court | New York Court of Appeals Court of Appeals |
Robert Abrams, Atty. Gen., Albany (Peter H. Schiff, Robert Hermann and Maurice K. Peaslee, Albany, of counsel), for appellant.
Frederick A.O. Schwarz, Jr., Corp. Counsel, New York City (John P. MacArthur, Albany, Edith I. Spivack and Gary Schuller, New York City, of counsel), for intervenor-appellant.
F. Peter O'Hara, Lewis Orgel and Herman Meltzer, Brooklyn, for respondent Brooklyn Union Gas Co.
Melvin H. Osterman, Jr., Michael Whiteman and Jonathan P. Nye, Albany, for N.Y. State School Boards Ass'n, amicus curiae.
David E. Blabey and Lawrence G. Malone, Albany, for N.Y. State Public Service Com'n, amicus curiae.
Henry J. Logan, County Atty., White Plains (Edwin G. Michaelian, Kenneth E. Powell, White Plains, and Andrea L. McArdle, Mount Vernon, of counsel), for Westchester County, amicus curiae.
Edward G. McCabe, County Atty., Mineola (Robert T. Bloom, Mineola, of counsel), for Nassau County, amicus curiae.
Melvin H. Osterman, Jr., Michael Whiteman and Jonathan P. Nye, Albany, for Westchester Municipalities, amicus curiae.
David M. Lascell, G. Robert Witmer, Jr., and Allan E. Floro, Rochester, for respondents Nat. Fuel Gas Distribution Corp. et al.
The issue presented on these appeals is whether the special franchise properties of the Brooklyn Union Gas Company, and those of National Fuel Gas Distribution Corporation and National Fuel Gas Supply Corporation, are specialty property, to be valued for special franchise assessment and taxation purposes by the reproduction-cost-new-less-depreciation (RCNLD) method, or whether a capitalization-of-income method of valuation is an acceptable method of valuation of such property. The Appellate Division, in both cases, has held that the petitioners' special franchise properties are not "specialty properties" and therefore that the capitalization-of-income method is an acceptable method of assessing the value of special franchise property in New York State. We disagree and therefore reverse the Appellate Division orders appealed from.
Brooklyn Union Gas Company (Brooklyn Union) is a distributor of natural gas, servicing customers in Kings County, Queens County and half of Richmond County. It operates its gas distribution business through a system of underground mains, services and related measuring and regulatory equipment that is placed in public streets and thoroughfares. This property, by statutory definition, constitutes a "special franchise". 1
Brooklyn Union's distribution system of mains is primarily located under public streets, and is composed of 63% cast iron mains with joints that operate at 15 pounds of pressure and require frequent repair. No new cast iron pipes have been installed since the mid-1950's, and none can now be installed because of the prohibitions of Public Service Commission rules. The mains are also composed of steel (34.25%) and plastic (.75%) and 2% of the system of mains belongs to New York Facilities, a joint operation of Brooklyn Union, Consolidated Edison and Long Island Lighting Company. Special Term found that the system would not be reproduced today in its present form.
Distribution's pipelines in New York are composed 9% plastic, 25% coated steel, 63% bare steel and 4% cast iron. Special Term found that Distribution's system would not be exactly reproduced in its present form, but would be reasonably expected to be replaced.
Special franchise property is defined as real property by Real Property Tax Law (RPTL) § 102(12). It is subject to annual assessment by the State Board of Equalization and Assessment (RPTL 600) and all taxes and special ad valorem levies for county, city, town, village, school or special district purposes are imposed on the final assessment of each special franchise (RPTL 622). Both the tangible real property and the intangible right to use the streets and thoroughfares (the intangible franchise) are components of a special franchise, and the values of each must be added to determine the value of the entire special franchise.
In April 1980, the State Board of Equalization and Assessment (SBEA) made tentative equalized valuations for the 1980-1981 tax year of the special franchise properties belonging to Brooklyn Union, Distribution and Supply. Each challenged the tentative assessment, contending that it was erroneous by reason of overvaluation, inequality and illegality. Distribution and Supply's challenge was rejected and they instituted proceedings against SBEA pursuant to RPTL article 7 contesting these final valuations.
Brooklyn Union's challenge to its valuation was also rejected by SBEA and instead of being reduced its final equalized valuation was increased because of a revised city-wide equalization rate. Brooklyn Union also instituted an article 7 proceeding against SBEA charging overvaluation, illegality and inequality.
At the trial of the Brooklyn Union proceeding, SBEA did not file an appraisal report or offer any testimony through its personnel as to the valuation method employed. Rather, it relied on the appraisal report and testimony of an expert employed by the City of New York (the city had been granted leave to intervene). The trial court rejected his testimony, finding that he lacked sufficient background and experience to qualify as an expert appraiser of special franchise property. The court also rejected his appraisal report because it failed to comply with the rules of the Appellate Division as to form and content. The court concluded that the record was barren of any evidence of the appraisal method employed by SBEA in arriving at its valuations. The court noted that the city's expert used the RCNLD method, but that the value he arrived at was more than $100,000,000 higher than that arrived at by SBEA. The court concluded that he did not perform the assessments for SBEA.
The court accepted the expert opinions of the petitioner's witnesses and their valuation of the special franchise property, which appraisals and valuations were arrived at through capitalization-of-income and original-cost-less-depreciation (rate base) appraisal methods. The court accepted the capitalization-of-income method of valuation as "a legitimate method for valuing a special franchise * * * especially when the only evidence in the record is that the system, if reproduced, would not be reproduced in its present form." The court determined the final equalized values of Brooklyn Union's special franchise property, located in Kings, Queens and Richmond Counties, for the tax year 1980-1981, to be $83,336,183, $45,511,625 and $25,990,355 respectively. These valuations were significantly lower than the final assessments of SBEA.
The Appellate Division affirmed, concluding that the "capitalization of income method used herein provides the most accurate method of determining value", and that rejection of the RCNLD method of appraisal was proper since "the system would never be reproduced in its present form but would be replaced with a new completely modern system". The court found that, in the parlance of an expert real estate appraiser, "means replacement with an exact model" which "this case * * * is totally unrealistic". Thus, the court held that Brooklyn Union's franchise property "could not be considered a specialty since it is unreasonable to conclude that the facility could be replaced on an economic basis." The court noted, moreover, that it would "reach the same result even if the facility were considered a specialty" (101 A.D.2d 414, 416-417, 477 N.Y.S.2d 693).
National Fuel Gas Distribution Corporation (Distribution) and National Fuel Gas Supply Corporation (Supply) are subsidiaries of National Fuel Gas Company. Distribution is a multistate retailer of natural gas serving customers in New York, Pennsylvania and Ohio. Supply accumulates and sells natural gas at the wholesale level, serving essentially the same geographic area as Distribution. The area served by Distribution and Supply in New York State comprises 12 counties in western New York. They operate this portion of their systems through pipes, mains, conduits and other tangible personal property located in public streets and thoroughfares. This property too is a "special franchise."
Distribution and Supply commenced 10 separate proceedings challenging the SBEA assessments alleging overvaluation, inequality and illegality. The proceedings were consolidated for trial and Niagara-Wheatfield Central School District was permitted to intervene. SBEA appraisal reports, received in evidence, showed that Distribution and Supply's special franchises for 1980 were assessed by computing the reconstruction cost new of all their tangible special franchise property in New York and deducting appropriate figures for depreciation from all causes. SBEA added 5% of the value of the tangible property as the value of the intangible franchises. The total full value assessments for Distribution and Supply were then allocated to the individual taxing jurisdictions by applying a ratio of surviving original cost in each jurisdiction to total surviving original cost for each company. Appropriate equalization rates were applied. These computations produced final total equalized special franchise assessments of $65,071,328 for Distribution and $813,694 for Supply.
Petitioners' experts arrived at full market values of the special franchise properties of Distribution and Supply by using capitalization-of-income under the "unit"...
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