Ellison v. Dep't of Revenue

• Decision Date: 09 November 2017
• Docket Number: SC S064092.
• Citation: 362 Or. 148,404 P.3d 933
• Parties: Barbara ELLISON, Plaintiff-Respondent, v. DEPARTMENT OF REVENUE, State of Oregon, Defendant-Appellant, and Clackamas County Assessor, Defendant.
• Court: Oregon Supreme Court

362 Or. 148

404 P.3d 933

Barbara ELLISON, Plaintiff-Respondent,

v.DEPARTMENT OF REVENUE, State of Oregon, Defendant-Appellant,andClackamas County Assessor, Defendant.

SC S064092.

Supreme Court of Oregon.

Argued and submitted June 14, 2017.

November 9, 2017

Denise G. Fjordbeck, Assistant Attorney General, Salem, argued the cause and filed the brief for appellant Department of Revenue. Also on the brief were Ellen F. Rosenblum, Attorney General, Benjamin Gutman, Solicitor General, and Daniel Paul, Assistant Attorney General.

Jack L. Orchard, Ball Janik, LLP, Portland, argued the cause for respondent Barbara Ellison. Bruce H. Cahn and Jack L. Orchard filed the brief.

Before Balmer, Chief Justice, and Kistler, Walters, Landau, Nakamoto, and Flynn, Justices, and Brewer, Senior Justice pro tempore.^*

BREWER, S. J.

In the underlying property tax appeal, the Tax Court rejected a request by the Department of Revenue (department) and the county assessor to increase the real market value of taxpayer's property, and the court later awarded taxpayer attorney fees against the department under ORS 305.490(4)(a) (authorizing discretionary award of attorney fees in ad valorem taxation cases if "the court finds in favor of the taxpayer"). The department appeals the attorney fee award only. As we will explain, even though the Tax Court also rejected the taxpayer's request for a reduction in real market value, we conclude that the legal prerequisite for a discretionary attorney fee award under that statute—that the court found "in favor of the taxpayer"—was met. We also conclude that the Tax Court did not err in applying most of the factors on which it relied in making the fee award. However, we conclude that the court's use of one factor was erroneous, thus bringing into question the court's overall exercise of discretion. Accordingly, we vacate the attorney fee award and remand for the court to exercise its discretion without considering that factor.

I. OVERVIEW

A. The Underlying Appeal

Even though this case involves only the propriety of a discretionary award of attorney fees, the Tax Court's decision on the merits in the underlying property tax appeal provides the necessary context for our analysis. At issue in that appeal was the real market value for tax year 2011-12 of two tax lots (the property) owned by taxpayer. The tax lots are part of a high-end horse breeding and training facility and an associated residence. Taxpayer substantially completed construction before January of 2011, and thus the value for that year would establish an exception value for the property.¹

The county assessor originally found a real market value for the two tax lots, both land and improvements, of $9,279,571. Taxpayer appealed that value to the county Board of Property Tax Appeals (BOPTA). BOPTA affirmed without changing that value.

Taxpayer next appealed to the Magistrate Division of the Oregon Tax Court. Before the magistrate, the department and assessor asserted a real market value of $18,275,412. Taxpayer, by contrast, appears to have asserted a much lower real market value than that affirmed by BOPTA (although the exact amount does not appear in the record). The magistrate accepted neither value, nor was she able to determine the correct real market value from the appraisals provided. She therefore affirmed BOPTA's determination of real market value.

Taxpayer then appealed to the Regular Division of the Tax Court. Her complaint asserted a real market value of less than $4.8 million,² though by the time of trial she had revised that upward to $8.8 million. In contrast, in their answer to taxpayer's complaint in the Regular Division, the department and county assessor asserted a value of almost $20 million, which was slightly higher even than the amount they had originally asserted before the magistrate.³

At trial, the parties offered appraisals to support their respective valuations. Both appraisers agreed that the cost approach was the best way to determine real market value. Their primary disagreement concerned the question of external obsolescence and its effect, if any, on the value of the property. In asserting a lower value, taxpayer's appraiser, Gilmore, concluded that there was significant external obsolescence. In support of the department's proposed higher value, its appraiser, Healy, asserted that there was no external obsolescence at all.⁴ Before turning to a more detailed review of the two appraisals, it is useful to provide an overview of several property valuation principles that were factors in the underlying appeal.

B. Valuation Principles

The starting point for calculating property taxes is the property's real market value. Dept. of Rev. v. River's Edge Investments, LLC, 359 Or. 822, 825, 377 P.3d 540 (2016). For that purpose, "real market value" is defined in essence to be what a buyer would pay a seller in an arm's length transaction on the assessment date. Or. Const., Art XI, § 11 (11)(a)(A);⁵ ORS 308.205(1).⁶ To determine the real market value of property, appraisers use three approaches: the cost approach, the income approach, and the comparable sales approach. OAR 150-308.205-(A)(2)(a). The approaches are named for the types of indicators that the appraiser uses to estimate the value that a purchaser in the market would pay for the property. The cost approach considers "the cost of constructing a substitute property that provides the same utility as the subject property at its highest and best use"; the income approach relies on the income stream that the property generates; and the comparable sales approach examines the prices that buyers have paid for similar properties. See Hewlett-Packard Co. v. Benton County Assessor, 357 Or. 598, 603, 356 P.3d 70 (2015). Appraisers must consider each approach, but they need not use them all. See, e.g., River's Edge, 359 Or. at 827, 377 P.3d 540. An appraiser may well conclude that one of the three approaches represents the best approximation for the real market value. Appraisal Institute, The Appraisal of Real Estate600 (12th ed. 2001) (appraiser weighs approaches "and relies most heavily on the approach that is most appropriate to the nature of the appraisal problem"); see, e.g., Brooks Resources Corp. v. Dept. of Revenue, 286 Or. 499, 505-07, 595 P.2d 1358 (1979) (on facts of that case, court concluded that income approach provided better measure of value than cost approach).

Another type of property value is use value (also known as "value in use"). Use value essentially looks to the economic value that the property has to its current owner, without regard to what price the property might draw in the market. Appraisal of Real Estateat 24-25; STC Submarine, Inc. v. Dept of Rev., 320 Or. 589, 595-96, 890 P.2d 1370 (1995) (to same effect). Use value often differs from market value, and it can be significantly higher than market value:

" 'For example, a property may be designed to produce a special product, the patent for which is held only by the owner of the property. Such a property would have little value to any other person but could be of great value to the owner of the patent.' "

STC Submarine, 320 Or. at 596, 890 P.2d 1370 (quoting Truitt Brothers, Inc. v. Dept. of Rev., 10 OTR 111, 114, 1985 WL 6314 (1985) ).

In some cases, a property has no immediate market value. In that circumstance, the "real market value" is the amount that would justly compensate the owner if the property were lost. ORS 308.205(2)(c).⁷ Although this court does not appear to have directly addressed the issue, the Tax Court has held that the just compensation standard in ORS 308.205(2)(c) is not use value; it is still market value. Truitt Brothers, Inc. v. Dept. of Rev., 10 OTR 111, 113-15, 1985 WL 6314 (1985), aff'd on other grounds, 302 Or. 603, 732 P.2d 497 (1987) (discussing concepts and explaining its conclusion). The department's rule implementing ORS 308.205(2)(c), the "especial property" rule, comports with that understanding. It states that, if comparable sales are not available for a property, then "real market value" will be determined using only the cost approach and/or the income approach. OAR 150-308.205-(A)(3).⁸ In their briefing to the Tax Court, the department and county assessor both adopted that understanding of the statute and rule.

In this case, both parties used the cost approach. In doing so, the major difference between the appraisers' opinions was whether and to what extent the property had external obsolescence (sometimes also called economic obsolescence). External obsolescence is

"a loss in value caused by factors outside a property. It is often incurable. External obsolescence can be either temporary (e.g., an oversupplied market) or permanent (e.g., proximity to an environmental disaster)."

Appraisal of Real Estateat 412; see J.R. Simplot Co. v. Dept. of Rev., 321 Or. 253, 260, 897 P.2d 316 (1995) (same). Because of its amorphous quality, external obsolescence has been called a " 'ghostly apparition,' " a " 'spirit whose presence may be discerned but whose intangible nature defies measurement' "; " 'it confuses and chills the marketplace.' " Truitt Brothers, Inc. v. Dept. of Rev., 302 Or. 603, 611, 732 P.2d 497 (1987) (quoting Truitt Brothers, 10 OTR at 118 ).

One final legal concept is relevant to the issues here. The Oregon Constitution creates a limit on the value at which real property may be assessed. Or. Const., Art XI, § 11 ; see Gall v. Dept. of Rev., 343 Or. 293, 295, 170 P.3d 558 2007) (explaining). That limit is known as the maximum assessed value. Or. Const., Art XI, § 11 (1)(a); Gall, 343 Or. at 295, 170 P.3d 558. Ordinarily, a property's maximum assessed value can only increase by three percent per year. Or. Const., Art XI, § 11 (1)(b); ORS 308.146(1). In specified exceptional circumstances, however, the maximum assessed value is calculated differently, and it can increase by more than three percent in a particular year. See Or. Const., Art XI, § 11 (1)(c); ORS 308.146...