Dep't of Revenue v. Marathon Pipe Line, LLC
| Decision Date | 13 May 2022 |
| Docket Number | 2021-CA-0626-MR |
| Parties | DEPARTMENT OF REVENUE, FINANCE AND ADMINISTRATION CABINET, COMMONWEALTH OF KENTUCKY APPELLANT v. MARATHON PIPE LINE, LLC APPELLEE |
| Court | Kentucky Court of Appeals |
NOT TO BE PUBLISHED
BRIEFS FOR APPELLANT: Richard W. Bertelson, III Frankfort, Kentucky
BRIEF FOR APPELLEE: Mark F. Sommer Jennifer Y. Barber Rachael H Chamberlain Louisville, Kentucky
The Department of Revenue, Finance and Administration Cabinet, Commonwealth of Kentucky (hereinafter referred to as the Department), appeals from a final opinion and order of the Franklin Circuit Court. That opinion and order affirmed a final order of the Kentucky Claims Commission, Tax Appeals (hereinafter referred to as the KCC) which determined that an underground pipeline owned by Marathon Pipe Line, LLC (hereinafter referred to as Marathon) should be classified as tangible personal property. The final order also determined an amount of ad valorem tax owed by Marathon for said pipeline. The KCC concluded that the tax amount suggested by Marathon's expert was more accurate and reasonable than the amount proposed by the Department. The Department argues on appeal that the KCC erred in not ruling that the pipeline should be classified as real property. The Department also claims that the KCC should have utilized the tax amount put forward by the Department and its expert. We find no error and affirm.
Marathon is a subsidiary of Marathon Petroleum Corporation. It is also a public service corporation (hereinafter referred to as a PSC). It owns or leases several thousand miles of pipeline throughout the United States. The pipeline in issue is a 265-mile long tract of underground pipes stretching from Owensboro to a Catlettsburg refinery. The pipeline transports crude oil to the refinery where it is processed and manufactured into gasoline and other products. Marathon's pipeline is located in a specialized economic zone called an activated foreign trade zone.
This case concerns the amount of ad valorem taxes owed by Marathon for its pipeline for the years 2014, 2015, and 2016. The parties agree that for the years in question, tangible personal property was being taxed at $0.45 per $100 of value and real property was being taxed at $0.12 per $100 of value. Tangible personal property located in a foreign trade zone, however, was taxed at a special rate of $0.001 per $100 of value. Kentucky Revised Statutes (KRS) 132.020(1)(g).
In 2012, Marathon's pipeline was assessed at a value of $60 million. In 2012, Marathon began a replacement and repair project of approximately 40 miles of its Kentucky pipeline. Following the completion of this project, in 2014, the Department assessed the pipeline's value at just over $242 million. In 2015, the Department valued the pipeline at $225 million, and in 2016 the Department assessed the pipeline's value at $240 million. Marathon protested these assessment values and asserted that the values of the pipeline for those years were $120 million, $106 million, and $106 million. The Department denied the protest, ruling that the pipeline was classified as real property and that the original assessments were correct.
Marathon then filed an appeal to the KCC on December 14, 2017. Extensive discovery took place. The Department hired an expert in property appraisal named Brent Eyre. Mr. Eyre appraised the value of the pipeline at $332, 997, 450.00 for the year 2014, $386, 875, 000.00 for the year 2015, and $386, 145, 000.00 for the year 2016. Marathon also hired an expert appraiser, Mark Andrews. Mr. Andrews appraised the value of the pipeline at $128, 581, 000.00 for the year 2014, $124, 568, 000.00 for the year 2015, and $135, 029, 000.00 for the year 2016.
The KCC bifurcated the appeal. The first issue to determine was whether the pipeline should be classified as real property or as tangible personal property. After a hearing, the KCC hearing officer entered a recommended order which concluded that the pipeline was tangible personal property as argued by Marathon and not real property as claimed by the Department. Thereafter, a three-day hearing was held to determine the value of the pipeline. The hearing officer entered another recommended order which found the taxable value of the pipeline to be $112, 719, 894.00 for the year 2014, $106, 385, 565.00 for the year 2015, and $116, 087, 260.80 for the year 2016. The KCC adopted the recommended orders and the Department appealed. The Franklin Circuit Court affirmed and this appeal followed.
As this is an appeal from an administrative agency, there is a specific standard of review we must follow. This Court's standard of review for an administrative adjudicatory decision is the clearly erroneous standard. Stallins v City of Madisonville, 707 S.W.2d 349, 351 (Ky. App. 1986). A decision is clearly erroneous if it is not supported by substantial evidence. Id.
Substantial evidence is defined as evidence, taken alone or in light of all the evidence, that has sufficient probative value to induce conviction in the minds of reasonable people. If there is substantial evidence to support the agency's findings, a court must defer to that finding even though there is evidence to the contrary. A court may not substitute its opinion as to the credibility of the witnesses, the weight given the evidence, or the inferences to be drawn from the evidence. A court's function in administrative matters is one of review, not reinterpretation.
Thompson v. Kentucky Unemployment Ins. Comm'n, 85 S.W.3d 621, 624 (Ky. App. 2002) (footnotes and citations omitted).
The Department's first argument on appeal is that Marathon's pipeline should have been classified as real property. KRS Chapter 136 concerns the taxation of corporations and utilities, including PSCs. KRS 136.010(1) defines real property as "all lands within this state and improvements thereon." KRS 136.010(2) defines personal property as "every species and character of property, tangible and intangible, other than real property." Citing Payne v. Rutledge, 391 S.W.3d 875, 879 (Ky. App. 2013), and other cases, the Department argues that the pipeline is an improvement upon land because it increases the "value or utility" of the land. The Department also cites to Cumberland Pipe Line Co. v. Lewis, 17 F.2d 167, 174 (E.D. Ky. 1926), which held that a similar underground oil pipeline should be classified as real property for tax purposes.
The Department also cites to 103 KAR[1] 8:090. That regulation states:
The regulation then goes on to classify a transmission pipeline as real property. Even though Marathon classifies the pipeline in question as a trunk line, the Department claims that a trunk line is a transmission line; therefore, it is real property.
The KCC and trial court held that the pipeline was personal property and we agree. We believe the trial court's reasoning behind this conclusion is persuasive and we adopt it. The trial court stated:
[Marathon] has embedded pipeline in the ground for the sole purpose of furthering its business. The pipeline carries crude oil to a refinery. The pipeline is buried because of above-ground obstructions, including roadways, bridges, and waterways, and has not adapted to the use of the land above it. The record reflects that the intention of the parties was not to make the pipeline part of the realty, that is, a permanent accession to the freehold. [Marathon] asserts, and the record shows, that the intention of the parties is for...
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