Clark v. STATE BOARD OF TAX COM'RS

• Decision Date: 08 January 2001
• Docket Number: No. 49T10-9701-TA-53.,49T10-9701-TA-53.
• Citation: 742 N.E.2d 46
• Parties: Ronald D. CLARK, Petitioner, v. STATE BOARD OF TAX COMMISSIONERS, Respondent.
• Court: Indiana Tax Court

742 N.E.2d 46

Ronald D. CLARK, Petitioner, v. STATE BOARD OF TAX COMMISSIONERS, Respondent.

No. 49T10-9701-TA-53.

Tax Court of Indiana.

January 8, 2001.

Curtis J. Dickinson, Dickinson & Abel, David L. Pippen, Attorney at Law, Indianapolis, IN, Attorneys for Petitioner.

Steve Carter, Attorney General of Indiana, Kathryn Symmes Kirk, Deputy Attorney General, Indianapolis, IN, Attorneys for Respondent.

FISHER, J.

Petitioner Ronald D. Clark appeals the final determination of the State Board of Tax Commissioners (State Board) establishing the assessed value for Clark's property as of March 1, 1993. Clark presents various issues for review. These are restated as:

I. Whether the State Board improperly adjusted the grade assigned Clark's apartment units from C to C-1 in order to account for items included as part of the GCR Apartment model but not found in the subject units; and

II. Whether the State Board erroneously refused to recognize causes of economic obsolescence in the subject units;¹

FACTS AND PROCEDURAL HISTORY

Clark owns a partnership interest in apartment units in Tippecanoe County, Indiana. The apartments are leased primarily to students attending Purdue University. On December 9, 1993, Clark filed a Form 131 petition for review with the State Board, contending that an "improper amount of obsolescence depreciation [had been] applied." (State Bd. Tr. of Proceedings, Ex. A.) An administrative hearing was conducted on February 20, 1996. At the hearing, Clark claimed that the "grade of the subject property is more accurately described as a D + 1," in addition to requesting a fifteen to twenty percent adjustment for economic obsolescence. (Joint Ex. 2.) The subject property was inspected on February 21, 1996. The State Board issued a final determination on November 22, 1996, lowering the subject units' grade from a C to a C-1 but declining to apply an obsolescence adjustment to the units. (State Bd. Tr. of Proceedings, Ex. C.) Clark filed this original tax appeal on January 6, 1997. The Court held a trial on June 18, 1998. The parties presented oral arguments to the Court on January 25, 1999. Additional facts will be supplied where necessary.

ANALYSIS AND OPINION

Standard of Review

This Court gives the final determinations of the State Board great deference when the State Board acts within the scope of its authority. Wetzel Enters., Inc. v. State Bd. of Tax Comm'rs, 694 N.E.2d 1259, 1261 (Ind. Tax Ct.1998). Accordingly, this Court reverses final determinations of the State Board only when those decisions are unsupported by substantial evidence, are arbitrary or capricious, constitute an abuse of discretion, or exceed statutory authority. Id. The taxpayer bears the burden of demonstrating the invalidity of the State Board's final determination. Clark v. State Bd. of Tax Comm'rs, 694 N.E.2d 1230, 1233 (Ind. Tax Ct.1998).

Discussion

I. Grade Adjustment

Clark argues that the C-1 grade assigned by the State Board was improper because the State Board provided no basis for its determination.² Clark's position is based upon the lack of specificity in the State Board's final determination, which supported the change in grade with this single sentence explanation: "Upon inspection of the property, it is determined [that] the property is indicative of a C-1 grade." (State Bd. Tr. of Proceedings, Ex. C.) His basic argument is that the State Board's reasons for assigning the C-1 grade "can only be considered post hoc rationalizations." (Pet'r Br. at 5.)

As testified to by the State Board's hearing officer Ellen Yuhan, the State Board's grade adjustment accounted for items missing from the units that are included as part of the GCR Apartment model. (Trial Tr. at 28-29.) Specifically, the adjustment accounted for the subject units' eight-foot walls (instead of the nine-foot wall height provided by the model), lack of concrete block back-up walls³ and lack of sliding glass doors. Id.; IND.ADMIN. CODE tit. 50, r. 2.1-4-7 (1992) (codified in present form at id., r. 2.2-11-3 (1996)). Using the regulations' unit-in-place tables, see IND.ADMIN.CODE tit. 50, r. 2.1-4-10 (1992) (codified in present form at id., r. 2.2-15-1 (1996)), Yuhan calculated the value of these missing items. (Trial Tr. at 29-30.) She determined their value to equal approximately five percent of the assessment. (Trial Tr. at 28-29.) Therefore, she assigned the subject units a grade of C-1, effectively lowering their assessed value by five percent. IND.ADMIN.CODE tit. 50, r. 2.1-4-5 (1992) (Schedule F) (codified in present form at id., r. 2.2-11-7 (1996)).

Nowhere in its final determination does the State Board explain its rationale for adjusting the subject units' grade. "It is well-settled that the State Board, in general, may not support a final determination by referring to reasons that were not previously ruled upon, but that are offered as post hoc rationalizations." Word of His Grace Fellowship, Inc. v. State Bd. of Tax Comm'rs, 711 N.E.2d 875, 878 (Ind. Tax Ct.1999). Here, Yuhan's trial testimony provides the first explanation as to her methodology for determining a grade adjustment. The State Board may not provide its explanation for the first time on appeal. Id. at 878-79 (explaining reasons for this rule). Therefore, the Court REVERSES and REMANDS the State Board's grade determination.

The State Board's adjustment was not made to account for variations in its quality of materials, workmanship and design per IND.ADMIN.CODE tit. 50, r. 2.1-4-3(f) (1992) (codified in present form at id., r. 2.2-10-3 (1996)). Rather, as noted supra, Yuhan made the adjustment to account for deviations of the subject units from the specifications of the GCR Apartment model. An improvement's deviation from the model used to assess it may be accounted for in two ways. "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." Whitley Prods., 704 N.E.2d at 1117 (citations omitted). This method allows an assessing official to make an objective adjustment to the improvement's base rate. Id. Another method to account for an improvement's deviation is application of a grade adjustment. Id. "Where possible, this type of an adjustment should be avoided" because it requires an assessing official's subjective judgment. Id. "However, because the component (base rate adjustment) schedules are not comprehensive, this type of adjustment may be necessary." Id.

Yuhan testified that she used the unit-in-place tables to calculate the value of the missing items. (Trial Tr. at 29-30.) Thus, she could have objectively accounted for the deviations using the unit-in-place tables. Use of objective adjustments is preferable and must be done where the base rate adjustment and/or unit-in-place tables permit the deviations' values to be reasonably calculated.⁴See Whitley Prods., 704 N.E.2d at 1117; see also Inland Steel Co. v. State Bd. of Tax Comm'rs, 739 N.E.2d 201, 231-32 (Ind. Tax Ct.2000) (noting that the "preferred method for calculating deviations from the models is to use separate schedules showing the costs of components" and concluding that taxpayer's use of unit-in-place tables to calculate a corresponding grade increase to account for items not included in model did not establish prima facie case as to grade), pet. for review filed Dec. 22, 2000.

Upon remand, Clark must submit probative evidence sufficient to establish a prima facie case as to grade. See Whitley Prods., 704 N.E.2d at 1119; CDI, Inc. v. State Bd. of Tax Comm'rs, 725 N.E.2d 1015, 1019 (Ind. Tax Ct.2000); see also King Indus. Corp. v. State Bd. of Tax Comm'rs, 699 N.E.2d 338, 343 (Ind. Tax Ct.1999). The State Board must consider any probative evidence in a meaningful manner. Clark, 694 N.E.2d at 1235. If the State Board deems the grade to be other than that as shown by Clark's evidence, the State Board must support its final determination with substantial evidence.⁵ The State Board is instructed to use the unit-in-place tables to calculate the value of those items included in the GCR Apartment model but not found in the subject units, where the State Board can reasonably identify and apply values for the missing items from the unit-in-place tables.⁶ Accordingly, if the unit-in-place tables are used, the missing items cannot be the basis for the lowering of the subject units' grade in this case.⁷

II. Economic Obsolescence

Clark argues that a reduction for economic obsolescence should have been applied to the subject units. (Pet'r Br. at 9-10.) Clark contends that he presented the State Board with "considerable evidence of causes of [economic] obsolescence." (Reply Br. at 5.) Specifically, he alleges that the high tenant turnover rate, excessive maintenance costs, lack of adequate parking and poor land-to-building ratio are all causes of economic obsolescence. (Pet'r Br. at 9.)

Clark had to present probative evidence sufficient to establish a prima facie case that the subject units suffered from causes of economic obsolescence. See Western Select Properties v. State Bd. of Tax Comm'rs, 639 N.E.2d 1068, 1075 (Ind. Tax Ct.1994); see also Loveless Constr. Co. v. State Bd. of Tax Comm'rs, 695 N.E.2d 1045, 1049-50 (Ind. Tax Ct.1998) (concluding that taxpayer's evidence constituted prima facie case of economic obsolescence), review denied. "Obsolescence depreciation is composed of functional and economic loss of value.... Economic obsolescence is caused by factors external to the property." IND.ADMIN.CODE tit. 50, r. 2.1-5-1 (1992) (codified in present form at id., 2.2-10-7(e) (1996)). Obsolescence is expressed as a percentage reduction in the remaining value of the subject improvement. Id. (codified in present form at id., r. 2.2-10-7(f) (1996)). Determination of obsolescence involves (1) identification of causes of obsolescence and (2) quantification of the amount of obsolescence to be applied.⁸Cla...