Independent Sch. Dist. No. 99 v. Commissioner of Tax., 43428

• Decision Date: 19 October 1973
• Docket Number: No. 43428,43428
• Citation: 211 N.W.2d 886,297 Minn. 378
• Court: Minnesota Supreme Court
• Parties: INDEPENDENT SCHOOL DISTRICT NO. 99, et al., Relators, v. COMMISSIONER OF TAXATION, Respondent, Minnesota Power & Light Company, Intervenor, Respondent.

Page 886

211 N.W.2d 886

297 Minn. 378

INDEPENDENT SCHOOL DISTRICT NO. 99, et al., Relators, v. COMMISSIONER OF TAXATION, Respondent Minnesota Power & Light Company, Intervenor, Respondent.

No. 43428.

Supreme Court of Minnesota.

Oct. 19, 1973.

Rehearing Denied Nov. 23, 1973.

Syllabus by the Court

1. In determining market value of utility properties for ad valorem tax purposes, the assessing authorities, pursuant to statutory mandates, should consider and give due weight to every element and factor affecting market value.

2. A formula making original cost less limited depreciation synonymous with market value violates statutory mandates for determining market value and, when employed to the exclusion of a consideration of all valuation factors, is arbitrary and unreasonable.

Peterson & Popovich and James E. Knutson, Peter S. Popovich, and Ivars J. Krafts, St. Paul. Donald J. Diesen, County

Atty., Carlton, (for Carlton County), for relators.

Warren Spannaus, Atty. Gen., Ronald S. London and Edwin P. Lee, Spec. Asst. Attys. Gen., St. Paul, for Comm. of Taxation.

Sullivan, Hanft, Hastings, Fride & O'Brien, Edward T. Fride, and Raymond L. Erickson, Duluth, for Minn. Power & Light Co.

Heard and considered en banc.

ROGOSHESKE, Justice.

Certiorari by relators, all local tax assessing authorities, to review a decision of the Tax Court affirming respondent commissioner of taxation's order reducing the assessed valuation for 1966 for ad valorem tax purposes of portions of the structures and machinery of the Thomson Hydroelectric Station, owned by Minnesota Power & Light Company, intervening respondent taxpayer. Because we are unable to determine upon the record submitted that the Tax Court, in affirming the commissioner's order, made a de novo determination of the ultimate issue necessarily presented, namely, the market value of the property for tax purposes pursuant to statutory mandates as interpreted and applied by our prior decisions, and because the application of a formula alone for determining market value would be arbitrary and unreasonable, we reverse and remand to the Tax Court for further proceedings consistent with this opinion.

The structures and machinery of the hydroelectric station are a portion of the land and water rights of the taxpayer located on the St. Louis River in Thomson Township, Carlton County. The station was constructed in 1907 by the Great Northern Power Company. The original construction cost of the structures and machinery was $5,253,230.33. In 1927, the taxpayer purchased the station from Great Northern Power Company. The tax assessing authorities claim the purchase price was $11,631,770.82, representing $6,379,000 over the original cost of construction. Numerous improvements, additions, and machinery replacements were made between 1907 and 1966.

In August 1966, the assessed value of the property in question was fixed by the tax assessing authorities in which it was located at $1,081,646. ¹ On November 15, 1966, in response to taxpayer's petition, the commissioner of taxation, acting pursuant to his authority to reduce the assessed valuation of any real or personal property ² and in accordance with a newly devised formula for assessing utility properties, issued an order reducing the assessed value from $1,081,646 to $906,230. Presumably because of the lowering of the value of the tax base, the Carlton County Board of Commissioners, by formal motion, refused to accede to the commissioner's order and, joining with the taxing districts, appealed to the Tax Court. Intervening taxpayer, whose petition to reduce the assessed value of its property to $468,133 was denied by the commissioner's order, also appealed. At the extensive de novo trial before the Tax Court, the evidence introduced was primarily directed to supporting or rebutting the claim of the tax assessing authorities that the so-called 1962 formula--adopted and applied since 1962 as the sole basis by which the market value of all Minnesota uitility properties was to be determined for ad valorem tax purposes and upon which the order reducing the assessed value of the property in question was based--was arbitrary, capricious, and unreasonable. Aided by expert opinion testimony, the tax assessing authorities presented various formulas to value utility properties--including replacement cost, capitalized earnings, comparable sales, indexed cost, and reproduction cost new less depreciation--all seeking to establish that the commissioner's original-cost approach embodied in the 1962 formula did not adequately reflect the market value of the property and that reproduction cost new less depreciation together with a consideration of all other factors or methods of valuation was the proper approach. Taxpayer produced other experts who testified that, although the original-cost approach may not reflect the value of certain types of property, it is a proper approach in valuing utility properties.

There appears to be no disagreement that some type of formula is normally employed by taxing authorities throughout the United States for valuation for tax purposes of utility properties. ³ It also appears without challenge that in 1961, when a new commissioner was appointed, there was a necessity to design and adopt some type of formula to replace the method of valuation used prior to his taking office because, the commissioner determined, the so-called unit-method formula, employed since 1940, ⁴ was neither a satisfactory nor uniformly applied method of valuing utility properties. ⁵ In 1961, the commissioner and his staff began studying the problem. After examing valuation methods used in other states and consulting with representatives of various utility companies, ⁶ he announced on May 31, 1962, by letter to the county assessing authorities, a change in the basis for valuation:

'The new method of valuing the property of electric utility and petroleum and gas pipeline companies which we have decided to adopt, beginning with the year 1962, will be based on cost. From this will be deducted depreciation of 25% In the case of property over ten years old. New property will be depreciated at the rate of 2 1/2% A year for the first ten years. In all instances this depreciated cost will be equalized at 33 1/3%. By allowing only 25% Depreciation, we are recognizing appreciation in value of older property.

'Cost of replacement will be considered as new cost. The depreciated cost of the item replaced or retired may be deducted from the cost of replacement in determining the net taxable cost. This net cost will be allowed depreciation at the same rate as new property.

'Presently (utility real property is) for the most part assessed at 45% Of original cost. Where special obsoleslence problems have developed, a lower percentage may have been applied. In 1962, the method of assessing will be substantially the same for real property as for personal property of utilities. New installations will be assessed at 33 1/3% Of cost. 2 1/2% Of depreciation will be allowed each year for ten years and a residual value of 75% Of cost will be maintained until the facility is removed. All changes of assessment, after removals and additions have been accounted for, are to be limited to 10%.'

As the Tax Court found, application of this original-cost-less-limited-depreciation formula, when first adopted in 1962, necessitated substantial adjustments in many taxing districts and '(i)n order that no taxing district would suffer material losses in taxable value and no taxpayers would be subjected to drastic increases,' the commissioner authorized a 10-percent limit each year in changes in valuation based on the new formula. In 1966, the commissioner canceled the upward transitional differentials. ⁷ The tax assessing authorities challenge the 1962 formula arguing that the formula does not reflect market value and that a different formula should be used. ⁸

The critical as well as the only disputed finding of the Tax Court challenged here is:

'Appellants (the tax assessing authorities) herein have challenged the application of the Commissioner's 1962 formula as arbitrary, unreasonable and capricious. The Court finds that the Commissioner's 1962 formula is not arbitrary, capricious or unreasonable. Its adoption by the Commissioner in 1962 and its application as reflected in the Order of November 15, 1966, here challenged, is within the legal authority conferred on the Commissioner.'

As conclusions of law, the court determined:

'The Order of November 15, 1966, was properly issued by the Commissioner in his status as Commissioner of Taxation.

'The Commissioner's formula, as adopted in 1962 and applied thereafter, is not arbitrary, capricious or unreasonable and is within the legal authority conferred upon the Commissioner of Taxation.

'The Commissioner of Taxation's Order of ...