Comm'r of Revenue v. CenterPoint Energy Res. Corp.
| Docket Number | A22-1069 |
| Decision Date | 14 June 2023 |
| Parties | Commissioner of Revenue, Appellant, v. CenterPoint Energy Resources Corp., dba CenterPoint Energy Minnesota Gas aka CenterPoint Energy Minnegasco, Respondent. |
| Court | Minnesota Supreme Court |
Tax Court Office of Appellate Courts
Keith Ellison, Attorney General, Kristine K. Nogosek, Jennifer A Kitchak, Assistant Attorneys General, Saint Paul, Minnesota for relator.
Paul B. Kilgore, Eric S. Johnson, Fryberger, Buchanan, Smith &Frederick, P.A., Duluth, Minnesota, for respondent.
1. The tax court did not err in rejecting some of the testimony of the Commissioner of Revenue's expert.
2. The tax court applied the proper burden of proof when evaluating the taxpayer's claim of external obsolescence and did not clearly err in determining that the subject property suffered external obsolescence.
Affirmed.
In a proceeding before the Minnesota Tax Court, Minnesota CenterPoint Energy Resources Corp., dba CenterPoint Energy Minnesota Gas, aka CenterPoint Energy Minnegasco (Minnegasco) challenged the Commissioner of Revenue's valuations of its natural gas distribution pipeline system for January 2 2018, and January 2, 2019. The tax court reduced the Commissioner's valuations and ordered the Commissioner to recalculate Minnegasco's tax liability. The Commissioner appeals the tax court decision, challenging the court's income-capitalization approach and its cost approach. On the income-capitalization approach, the Commissioner argues that the court erred when it disregarded the capitalization-rate opinions of the Commissioner's expert. And on the cost approach, the Commissioner argues that the court erred in its external-obsolescence analysis by applying the wrong burden of proof and by determining that Minnegasco's property suffered external obsolescence. For the reasons that follow, we reject the Commissioner's arguments and affirm the tax court.
Minnegasco owns and operates a natural gas distribution pipeline system in Minnesota. Minnegasco's pipeline system is taxed in Minnesota, and the Commissioner values and assesses pipeline systems for tax purposes. Minn. Stat. § 272.02, subd. 9(a) (2022); Minn. Stat. § 273.33, subd. 2 (2022). The Commissioner assessed Minnegasco's pipeline system property as of January 2, 2018, and January 2, 2019.
Minnegasco challenged the Commissioner's assessments for both years. The tax court consolidated the challenges and heard them in a 3-day trial. The parties offered conflicting expert testimony in support of their respective positions. In support of its position that the Commissioner's valuations were excessive, Minnegasco presented expert appraisals and testimony from Thomas K. Tegarden. The Commissioner relied on the expert opinion and reports of James B. Heaton (Heaton), to support higher valuations of Minnegasco's pipeline system than the amounts originally calculated in the Commissioner's 2018 and 2019 valuations. Minnegasco also offered a financial expert to review Heaton's valuations. In response to Minnegasco's experts, the Commissioner presented two other experts.
After considering the evidence, the tax court conducted its own independent valuations and issued a thorough order specifying its findings of fact and conclusions of law. The court's valuations differed from both parties' expert reports, but ultimately, the court agreed with Minnegasco that the Commissioner's 2018 and 2019 valuations must be reduced. In valuing Minnegasco's property, the court used two of the three approaches to valuing property, the income-capitalization and cost approaches.[1]
In the tax court's income-capitalization analysis, the court noted concerns with the methodologies that Heaton advocated for and ultimately rejected parts of his testimony and conclusions. Specifically, the court noted Heaton's attempts to distance himself from the appraisal profession and his use of only one model without any check for one of the inputs. The court also referenced Heaton's criticism of certain models that the Commissioner used and relied on for the initial assessments of Minnegasco's pipeline system.
In the tax court's cost approach, the court deducted for external obsolescence over the Commissioner's objection. The court grounded its external-obsolescence conclusion in the testimony of Minnegasco's experts.
Ultimately, the tax court ordered the Commissioner to reduce the unit values of Minnegasco's property and recalculate Minnegasco's taxable value for both years. CenterPoint Energy Res. Corp. v. Comm'r of Revenue, Nos. 9252-R, 9358-R, 2022 WL 995851, at *1-2 (Minn. T.C. Mar. 16, 2022). The following table summarizes the Commissioner's original valuations, the valuations proposed by the parties' experts, and the court's market value determination, for each year:
Taxable Year
Commissioner's Assessment
Tegarden (Minnegasco)
Heaton (Commissioner)
Tax Court
2018
$1,078,779,200
$835,000,000
$1,154,693,655
$932,396,000
2019
$1,075,887,400
$780,000,000
$1,337,170,725
$874,422,000
See id. at *1-3.
The Commissioner filed a timely petition for a writ of certiorari in our court.
The Commissioner challenges the tax court's valuations on appeal. The Commissioner objects to both the court's income-capitalization approach and its cost approach. In challenging the court's income-capitalization approach the Commissioner argues that the court erred by disregarding the capitalization-rate opinions of the Commissioner's expert. And in challenging the court's cost approach, the Commissioner argues that the court erred as a matter of law by shifting the burden to the Commissioner to contradict Minnegasco's prima facie showing of external obsolescence and clearly erred in its external-obsolescence conclusions.
In reviewing a tax court's valuation of a property, "we defer to the tax court's determination unless it clearly misvalued the property or failed to explain its reasoning." Minn. Energy Res. Corp. v. Comm'r of Revenue (MERC I), 886 N.W.2d 786, 792 (Minn. 2016). Our review is limited and deferential; we consider "whether the tax court lacked subject matter jurisdiction, whether the tax court's decision is supported by evidence in the record, and whether the tax court made an error of law." Hohmann v. Comm'r of Revenue, 781 N.W.2d 156, 157 (Minn. 2010). "We review the tax court's market value determinations for clear error and its legal determinations de novo." Enbridge Energy, Ltd. P'ship v. Comm'r of Revenue (Enbridge II), 945 N.W.2d 859, 864 (Minn. 2020).
Minnesota Rules 8100.0100 to 8100.0600 (2021) are relevant to the valuation decisions at issue here. The administrative rules outline a four-step process for valuing utility company property and allocating taxes. Comm'r of Revenue v. Enbridge Energy, LP (Enbridge I), 923 N.W.2d 17, 21 (Minn. 2019). The process begins with the Commissioner "establish[ing] an estimate of the unit value" of the subject property. Minn. R. 8100.0200. Steps two through four involve allocating and apportioning the estimate of the unit value. See id. Rule 8100.0200 also includes a discretionary paragraph that outlines the Commissioner's "right to exercise discretion whenever the circumstances of a valuation estimate dictate the need for it."
Here, the parties focus on the Commissioner's discretion and step one-establishing the estimate of the unit value. "Unit value" is "the value of the entire system plant of a utility company taken as a whole without any regard to the value of its component parts." Minn. R. 8100.0100, subp. 16.
In determining the unit value, the cost and income-capitalization approaches provided in Rule 8100.0300 are used to determine the cost and income indicators of value. Enbridge II, 945 N.W.2d at 865. These indicators of value are then weighted to calculate the unit value. Minn. R. 8100.0300, subp. 5. The default weightings of the indicators of value place equal weight on the cost and income indicators (50 percent each). Id.
With this background in mind, our analysis begins with the tax court's incomecapitalization approach and then we turn to the court's cost approach.
Under the income-capitalization approach, the value of income-producing property is determined "by capitalizing the income the property is expected to generate over a specific period of time at a specified capitalization yield rate." Cont'l Retail, LLC v. County of Hennepin, 801 N.W.2d 395, 402 (Minn. 2011). In this approach, the utility company's "net income is capitalized by applying a capitalization rate that is computed by using the band of investment method." Minn. R. 8100.0300, subp. 4. The band of investment method considers various factors listed in Rule 8100.0300, subpart 4. As relevant here, the Commissioner calculates capitalization rates annually for electric companies, gas distribution companies, natural gas transmission systems, and fluid pipeline companies. Id. The Commissioner produces these rates and methodologies in capitalization rate studies and uses these studies to determine unit valuations of utility, pipeline, and railroad operating property in Minnesota. The capitalization rates that the Commissioner used in the 2018 and 2019 initial assessments of Minnegasco's pipeline system can be found in the capitalization rate studies for 2018 and 2019. The studies include a general discussion of the financial models used to calculate the band of investment method.
At trial, both Minnegasco's expert, Tegarden, and the Commissioner's expert, Heaton, advocated for capitalization rates that differed from the capitalization rates the Commissioner published in his annual rate studies. Although Tegarden and Heaton both used the band of investment method required by ...
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