HARVARD PILGRIM HEALTH CARE v. Gelati

• Decision Date: 17 December 2004
• Docket Number: No. 2003-229-Appeal., No. 2003-197-Appeal
• Citation: 865 A.2d 1028
• Parties: HARVARD PILGRIM HEALTH CARE OF NEW ENGLAND, INC., In Liquidation v. John GELATI, in his capacity as Acting Tax Assessor of the City of Providence.
• Court: Rhode Island Supreme Court

865 A.2d 1028

HARVARD PILGRIM HEALTH CARE OF NEW ENGLAND, INC., In Liquidation v. John GELATI,¹ in his capacity as Acting Tax Assessor of the City of Providence.

Nos. 2003-197-Appeal, 2003-229-Appeal.

Supreme Court of Rhode Island.

December 17, 2004.

Richard Welch, Providence, for Plaintiff.

Caroline Cornwell, Providence, for Defendant.

Before WILLIAMS, C.J., GOLDBERG, FLAHERTY, SUTTELL, and ROBINSON, JJ.

OPINION

PER CURIAM.

This is another in a series of tax appeals involving the plaintiff, Harvard Pilgrim Health Care (Harvard Pilgrim or plaintiff). In this case, Harvard Pilgrim challenges three Superior Court judgments upholding the City of Providence's (city) tangible personal property assessments for the tax years 1997, 1998, and 1999. This appeal came before the Supreme Court for oral argument on September 29, 2004, pursuant to an order directing the parties to appear and show cause why the issues raised in this appeal should not summarily be decided. After hearing the arguments of counsel and examining the memoranda filed by the parties, we are of the opinion that cause has not been shown and proceed to decide the appeal at this time. For the reasons indicated herein, we affirm in part and reverse in part.

I Facts and Travel

The procedural background of this case was well stated in our earlier decision:

"After unsuccessfully appealing assessments to the Providence Board of Tax Assessment Review, Harvard Pilgrim filed four separate actions in Superior Court alleging that the city valued its ratable personal property for tax years 1997, 1998, 1999, and 2000, respectively, in excess of fair market value in violation of G.L.1956 § 44-5-12. The four actions were consolidated for trial and heard before a trial justice without the intervention of a jury. After several days of hearings and the submission of post-trial memoranda, the trial justice found in favor of the city for three of the years [1997-1999], and held in favor of Harvard Pilgrim for tax year 2000." Harvard Pilgrim Health Care of New England, Inc. v. Rossi, 847 A.2d 286, 288 (R.I.2004) (Harvard Pilgrim I).²

A Full and Fair Cash Value & The City's Formula

Of central concern to the case is Harvard Pilgrim's assertion that the Superior Court erred in affirming the city's assessments of its ratable tangible personal property for tax years 1997, 1998, and 1999 in excess of full and fair cash value, violating G.L.1956 § 44-5-12. Section 44-5-12(a) provides that: "[a]ll property subject to taxation shall be assessed at its full and fair cash value or at a uniform percentage of its value, not to exceed one hundred percent (100%) to be determined by the assessors in each town or city * * *."³

Thomas Rossi (Rossi), then the city's tax assessor and the named defendant, testified that "the formula the city used to establish fair market value for items of tangible personal property was `acquisition cost minus depreciation.'" Harvard Pilgrim I, 847 A.2d at 289.

Rossi testified that the city assessors supplied a form on which property owners could list their ratable tangible personal property — although property owners are free to submit their annual "account" in any form that meets the statutory requirements of a "true and exact account of all ratable estate owned or possessed." Section 44-5-15. Taxpayers are asked to state the acquisition cost of listed items, the date of purchase, and whether the items were new or used at the time of purchase. Sections of the city's form pertinent to Harvard Pilgrim's accounts include: section two, tangible personal property; section three, computer equipment; section four, inventory/stock in trade/supplies; section five, tangible property leased or rented from others; and section six, leasehold improvements. While sections two and six include spaces for the taxpayer to declare fair market value, section three has no such space. Rossi testified that the city relied solely on the taxpayer's listed acquisition costs, ignoring taxpayer statements of fair market value; Roberta Vellucci D'Onofrio, supervisor of personal property in the assessor's office, also testified to that effect.

Rossi testified that the city applies depreciation schedules for furniture and equipment, computers, and leasehold improvements to arrive at a property valuation. Rossi reviewed the depreciation schedules for the tax years 1997-2000 in detail. He testified that he used the Marshall Swift Evaluation Service (or Marshall Swift Manual), a nationally used tool in the appraisal industry, as a guide to set depreciation schedules. The Marshall Swift Manual, in turn, is based on an Internal Revenue Service publication, as well as various studies of equipment and bookkeeping practices and appraiser's opinions.

For the 1997 and 1998 tax years, Rossi testified the city's depreciation schedules included a ten-year schedule for furniture, fixtures and equipment, a seven-year schedule for computers, and any of three different types of depreciation for leasehold improvements. The individual depreciation schedules, again derived from the Marshall Swift Manual, included varying percentage depreciations deducted from the acquisition cost of each item, depending on its age. For the tax years 1997 and 1998, the depreciation schedules started with a 5 percent deduction for assets in their first year, with a 10 percent decrease every year until the ninth year, when depreciation bottomed out at 20 percent. In the city's view, so long as an item has some use — no matter its age — it has taxable value.

Rossi testified that the only change to the depreciation schedules between the 1997 and 1998 tax years was the inclusion of depreciation for items purchased during the 1997 calendar year. However, for the 1999 tax year, the city adopted new depreciation schedules that became applicable to Harvard Pilgrim's personal property. The new schedules, for furniture, fixtures and equipment, as well as computers, adopted a 100 percent value (zero depreciation) for the first year of use.⁴ He testified that under the new schedule, furniture, fixtures, and equipment bottomed out at a 30 percent valuation, as opposed to 20 percent in previous years. Rossi stated that in his opinion, "the fair market values would be best reflected using 100 percent in those first years." When asked whether use of the depreciation schedules resulted in the fair market value of Harvard Pilgrim's listed assets for the years in question, Rossi replied affirmatively. On cross-examination, however, he admitted that the city's depreciation schedules did not specifically account for physical depreciation, functional obsolescence, or economic/external obsolescence. Rossi did not specifically rely on market data for secondhand computers in valuing computer depreciation, as did Harvard Pilgrim's appraiser. Further, Rossi noted that the city's figures for acquisition costs could properly include shipping, freight, and labor, another practice that Harvard Pilgrim disputed. Rossi repeatedly stated that the assessor must determine fair market value for the personal property of more than 7,000 taxpayers — with an overall number of items requiring assessment in the hundreds of thousands — characterizing the task as "impossible" and "difficult."

The city's witness, Thomas J. Sullivan (Sullivan), a CPA and consultant specializing in tax and health care, testified that the city's inclusion of what he called "soft costs," such as freight, shipping, and installation, were properly included as acquisition costs under "Generally Accepted Accounting Principles" (GAAP). He also said that the city's seven-year depreciation schedules for computers did not match GAAP, which applies a five-year schedule. On cross-examination, Sullivan said that from an accountant's viewpoint (not as an appraiser), the city's method of depreciation fails to reach fair market value. Nonetheless, he clarified that the formula, if uniformly applied to all city taxpayers, would share the tax burden equally.

Two witnesses for Harvard Pilgrim addressed the city's "acquisition cost minus depreciation" formula. John McEachern (McEachern), an appraiser, testified that he had never seen a depreciation system that followed the city's 100 percent first-year value for computers, furniture, or fixtures. Harvard Pilgrim's Accountant, George Moses (Moses), of Ernst & Young, an economist and former Boston assessor, also testified that the city's depreciation schedules for computers differed substantially from twenty-five other jurisdictions.

The trial justice concluded that the city's formula for reaching fair market value was not an illegal method of assessment. The Superior Court noted that Harvard Pilgrim's arguments in this respect were premised merely on a disagreement about methodologies for calculating full and fair cash value, while ignoring the important disjunctive in § 44-5-12. The trial justice said that "the statute requires uniformity in assessment of the method employed as long as it is even-handedly applied and Harvard Pilgrim introduced no evidence that it was not."

B Harvard Pilgrim's Annual Filings

Harvard Pilgrim timely filed its annual "account" filings with the city assessor for 1997-1999. Along with the city's form discussed above, Harvard Pilgrim provided a detailed "net book value" report listing approximately 9,000 assets, their date of purchase, and depreciation. On May 14, 1997, however, Moses notified the city assessors that Harvard Pilgrim had inaccurately reported its tangible personal property, and filed an amended return. In the amended return, Moses explained that Harvard Pilgrim had included assets that had been disposed in its report. The amended return also contended that labor, freight, and installation costs had been included improperly in Harvard Pilgrim's original filing.

Based on these inaccuracies, Moses hired Norman Levy & Associates, an inventory specialist company, to help Harvard Pilgrim...