Enbridge Energy, L.P. v. Commissioner of Revenue, 8858-R

CourtTax Court of Minnesota
Writing for the CourtJANE N. BOWMAN, JUDGE
PartiesEnbridge Energy, Limited Partnership, Appellant-Petitioner, v. Commissioner of Revenue, Appellee-Respondent.
Decision Date15 March 2021
Docket Number8858-R,8984-R

Enbridge Energy, Limited Partnership, Appellant-Petitioner,
v.

Commissioner of Revenue, Appellee-Respondent.

Nos. 8858-R, 8984-R

Tax Court of Minnesota, Regular Division, Ramsey County

March 15, 2021


ORDER ON REMAND

These consolidated matters came before The Honorable Jane N. Bowman, Judge of the Minnesota Tax Court, on remand from the Minnesota Supreme Court.

Paul B. Kilgore and Eric S. Johnson, Fryberger, Buchanan, Smith & Frederick, P.A., represent appellant-petitioner Enbridge Energy, Limited Partnership.

Jennifer A. Kitchak and Kristine K. Nogosek, Assistant Minnesota Attorneys General, represent appellee-respondent Commissioner of Revenue.

At issue is the value as of January 2, 2015, and January 2, 2016, of the Minnesota portion of Enbridge Energy, Limited Partnership's (EELP) crude oil pipeline system. Pursuant to the Minnesota Supreme Court's opinion in Enbridge Energy, Limited Partnership v. Commissioner of Revenue, 945 N.W.2d 859 (Minn. 2020), these matters are remanded "for the limited purpose of allowing the tax court to consider whether the circumstances of this case dictate a need to depart from [Rule 8100's] default weightings." Id. at 872.

The court, having reviewed and considered the evidence adduced at trial and the arguments of counsel, and upon all of the files, records, and proceedings herein, the court issues the following order on remand:

FINDINGS OF FACT ON REMAND

1. The Commissioner determined the market value of EELP's entire pipeline operating system to be $7, 129, 548, 100 as of January 2, 2015.

2. The market value of EELP's entire pipeline operating system as of January 2, 2015, was $6, 537, 881, 887, of which $1, 530, 518, 150 is attributable to Minnesota.

3. The Commissioner determined the market value of EELP's entire pipeline operating system to be $7, 950, 754, 500 as of January 2, 2016.

4. The market value of EELP's entire pipeline operating system as of January 2, 2016, was $7, 096, 296, 095, of which $1, 695, 305, 137 is attributable to Minnesota.

CONCLUSIONS OF LAW ON REMAND

1. The Commissioner overstated the system unit-value of EELP's pipeline operating system as of January 2, 2015.

2. The Commissioner overstated the system unit-value of EELP's pipeline operating system as of January 2, 2016.

ORDER ON REMAND

1. The Commissioner shall reduce the system unit-value of EELP's pipeline operating system as of January 2, 2015, to $6, 537, 881, 887, and shall adjust the value attributable to Minnesota to $1, 530, 518, 150.

2. The Commissioner shall reduce the system unit-value of EELP's pipeline operating system as of January 2, 2016, to $7, 096, 296, 095, and shall adjust the value attributable to Minnesota to $1, 695, 305, 137.

3. The Commissioner shall calculate the value of EELP's property "which is non-formula-assessed or which is exempt from ad valorem tax [and] is deducted from the Minnesota portion of the unit value" under Minn. R. 8100.0500 to arrive at EELP's taxable value, and shall file and serve that calculation no later than April 16, 2021.

4. No later than 15 days after service of the Commissioner's calculation, EELP may file and serve objections.

5. No later than 15 days after service of EELP's objections, the Commissioner may file and serve a response, if any.

6. If EELP files no objection to the Commissioner's calculation, the court will promptly file a final order for judgment. If EELP does file objections, the court will determine the appropriate deduction amount and EELP's taxable value, and then file a final order for judgment.

IT IS SO ORDERED.

MEMORANDUM

JANE N. BOWMAN, JUDGE

Appellant-petitioner Enbridge Energy, Limited Partnership owns and operates an interstate petroleum pipeline system in Minnesota and throughout the upper Midwest and elsewhere. This court previously concluded the Commissioner of Revenue undervalued the EELP pipeline system as of all assessment dates. Enbridge Energy, Ltd. P'ship v. Comm 'r of Revenue, Nos. 8858-R & 8984-R, 2019 WL 2853133, at *1 (Minn. T.C. June 25, 2019). Subsequently, EELP moved for rehearing, which this court denied. Enbridge Energy, Ltd. P 'ship v. Comm 'r of Revenue, Nos. 8858-R & 8984-R, 2019 WL 5995805, at *1 (Minn. T.C. Nov. 5, 2019). EELP appealed this court's decision to the Minnesota Supreme Court, which affirmed in part, reserved in part, and remanded for the limited purpose of allowing this court to determine if the circumstances of this case dictate a need to depart from Minnesota Rule 8100's default weighting.[1] Enbridge Energy, Ltd. P'ship v. Comm'r of Revenue (Enbridge II), 945 N.W.2d 859, 872 (Minn. 2020).

I. Procedural History

At issue in these consolidated matters is the fair market value, as of January 2, 2015, and January 2, 2016, of the Minnesota portion of a common-carrier pipeline system (known as the Lakehead system) that transports mainly crude oil from Western Canada to refineries in the United States and eastern Canada. Enbridge Energy, 2019 WL 2853133, at *2. The Lakehead system crosses several counties in northern Minnesota. Id. at *2.

Trial commenced on December 3, 2018. Id. at *6. The court was asked to consider the three main approaches to value-market, cost, and income. See id. *9-50. The market, or sales comparison approach, assumes, among other things, "that the value of property tends to be set by the cost of acquiring a substitute or alternative property of similar utility and desirability within a reasonable amount of time." Appraisal Institute, The Appraisal of Real Estate 352 (15th ed. 2020). In the cost approach, "the value of a property is derived by adding the appraiser's opinion of the value of the land to an estimated current cost of constructing a reproduction or replacement for the improvements and then subtracting the amount of depreciation …." Id. at 36. Generally, the income approach "is a method used … to convert a single year's income expectancy into a value indication." Id. at 459.

A. The Tax Court's June 25, 2019 Decision

On June 25, 2019, this court issued its decision in these consolidated matters, concluding the Commissioner understated the market value of the Lakehead system as of both assessment dates. Enbridge Energy, 2019 WL 2853133, at *1. This court did not place any weight on the sales comparison or stock-and-debt approach, as neither party advocated it. Id. at *11. Next, this court concluded to market values under the cost approach-$9, 372, 811, 623 and $10, 763, 859, 982, for 2015 and 2016, respectively. Id. at *22. Notably, this court did not decrease the value of the Lakehead system for obsolescence under the cost approach, concluding EELP "failed to meet its burden to show that either functional or economic obsolescence contributed to a decrease in the value of its pipeline property …." Id. Finally-and after a detailed analysis-this court valued the subject property under the income approach at $5, 322, 912, 000 and $5, 524, 483, 000 for the 2015 and 2016 assessments, respectively. Id. at *50.

Having determined values under both the cost and income approaches, this court then weighted the values evenly, concluding to $7, 347, 861, 812 and $8, 144, 171, 725, for the respective assessment dates. Id. The court noted the Commissioner's expert placed a 50/50 weighting on each approach, "following Minn. R. 8100, because it found no indication of external obsolescence." Id. Although EELP argued for heavier reliance on the income approach because the significant gap between the values was attributable to obsolescence, the court stated it "cannot attribute such obsolescence to any of EELP's posited external sources." Id. The court then concluded there was "no reason to deviate from the default weightings," thus placing equal weight on the two approaches per Rule 8100's instruction. Id.

B. The Tax Court's November 5, 2019 Order on EELP's Motion for Rehearing

After receiving the court's June 25, 2019 decision, EELP brought a motion for rehearing, asking for: (1) a reduction in value under the cost approach for construction work in progress (CWIP) amounts; (2) a reduction in value under the cost approach for economic obsolescence; (3) a change to the court's cost of capital conclusion; and (4) a change in weighting, specifically, EELP asked this court to put only "nominal weight" on the cost approach, with 80% weight going to the income approach. Enbridge Energy, 2019 WL 5995805, at *1.

The court denied EELP's motion in its entirety. Id. Relevant here, the court denied EELP's request to place 80% weight on the income approach, concluding it was "constrained in this case by Minn. R. 8100.0300, subp. 5." Id. at *14. Specifically, this court stated:

Although we may well give the income approach "overriding weight" or "primary emphasis" in valuing income-producing properties in general, we are constrained in this case by Minn. R. 8100.0300, subp. 5 See Comm'r of Revenue v. Enbridge Energy, L.P. 923 N.W.2d 17, 18-19 (Minn. 2019) (holding that Minn. R. 8100 "including its valuation formula, is binding on the tax court"). Rule 8100.0300, subp. 5, dictates a default weighting of 50 percent to the cost approach and 50 percent to the income approach. Rule 8100.0300 dictates this weighting even though the pipelines being assessed under the Rule are, by definition, income-producing. In other words, in promulgating Rule 8100 the Commissioner has decreed that we are to give the income and cost approaches equal weight even though the property being assessed is income-producing. Because administrative rules carry the force of statutes, EELP, 923 N.W.2d at 20, for pipelines the Commissioner has effectively overruled caselaw that gives greater weight to the income approach for income-producing properties simply because they are income-producing. Similarly, Rule 8100 requires the cost approach be given 50 percent weight, regardless of
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